From Morgan StanleyMonadelphous Group: Needs to win bigThe...

From Morgan Stanley

Monadelphous Group: Needs to win big
The outlook for MND's earnings appear increasingly binary, contingent on just one or two very large contract wins – a risky proposition in our view and one where we see risk as skewed to the downside. Near binary outcome ahead: Our analysis suggests MND could need to win ~A$1.5bn of new contracts to meet FY15-16 consensus revenue estimates (suggesting it wins ~50% of its tender pipeline). While not impossible wins of this size appear a low probability event given rapidly contracting E&C capex, particularly within MND’s core mining client base. In contrast, we believe our revenue forecasts, which are 9% below consensus, imply ~A$1bn of additional contract wins. Forward indicators point to a steeply negative trajectory. Indeed, FY14 guidance implies 2H14 revenue will fall 19% yoy. Similarly, work won during the half fell 30% while employee numbers declined 26%. A 3% cut to the interim dividend despite reported profit up 10% and capex of ~$3m versus depreciation of $13m also suggests MND may be cautious on the outlook. Margins to be challenged: As the revenue mix increasingly shifts to lower margin maintenance work (MND has indicated margins can be twice as high on E&C work) and ongoing competitive pressure impacts pricing. That said, MND appears to be doing a better job than expected of adjusting its cost base without the need for substantial restructuring costs. We have lowered our full year restructuring cost estimate to A$10m (from A$15m) which sees our FY14 EPS lift 6%. A few helping hands in 1H14: reported NPAT of A$79.2m was in line with our forecast. However this was aided by $3.7m of asset sale and FX gains while a lower tax rate contributed another ~$2m. Without this 1H14 NPAT would have been 6% below our estimate.