"There's a chance that MND's peers have poor visibility on future costs and undercut MND's contract pricing forcing them to lose out on contracts to smaller players domestically. This would create a short/medium term headache to MND earnings. Perhaps this is the causing the delay in new projects and contracts being awarded as miners assess the options they have."@Baggedem,
I don't share that characterisation of what's happening.
If you have been a manager operating in this sector of the economy for half an hour you'll know full well what the cost dynamics are, so the scope of peers undercutting MND's contracts and forcing them to lose out to smaller players, because of inadvertent under-costing, is negligible.
Also, your post connotes circumstances where there are too many contractors chasing too few projects (hence, some are missing out on work). Nothing could be further from the truth.
Indeed, the prevailing situation now is the very opposite of that - there is too much work going: the "Calls-For-Tender" in-trays of engineering contractors are so full that they really don't need to yield at all on price for fear of not being fully utilised.
So, the preempt your question, "Well, in that case, why is MND seeing a deferral of work?", the answer lies in the nature of the work that gets done by MND, namely at any given time it is busy with a discrete number of very large projects, and the MND's clients don't conveniently commission MND to end projects exactly at the last day of financial reporting periods, and commence new projects on Day 1 of the next financial period.
Engineering construction isn't nice, seamless and granular business like grocery retailing; here the work comes in big lumps and clumps and there is more often than not sub-optimal timing between one set of projects ending and the next set commencing. (Heck, it can take a month or two to just demobilise from one site and re-mobilise on the next site even if the projects have been all neatly line up, ready and waiting).
So, no, the problem here is not heightened competition for a limited amount of proejects which is leaving MND without work; rather, it is merely a timing issue due to the sheer Big Project physics.
The beef I have with MND (and I think the beef its shareholders should have) is that it has not been charging properly for the work it has been doing, leaving Earnings flat while Revenues are going up.
(With little doubt, to me the articulation in the latest result announcement of adopting a more "tactical" approach to new projects, is management acknowledging awareness of the margin problem and it is management-speak of, "
We are going to ratchet up our price lists, and if clients don't like it we have more than enough other work on which to bid. And, by the way, good luck to those clients who don't like our new price list, in finding someone else to do the work.")
So if I sound bearish on MND, I'm not: for the reasons discussed above, I think the operating margin experience in FY2024 and FY2025 will look greatly enhanced.
And I just didn't like the drunken valuation going into the result, but that is sobering up now.
So:
Robust demand + Increasing Margins + Improving Valuation by the day
I like the set-up that is forming.
On that valuation question, you said, "
Given the stock is on ~25x P/E on FY23(e), the market appears to assume that MND will win those contracts for FY24 and beyond," beware of applying P/E as a valuation metric... a full 15% of this company's Market Cap is net cash-backed, so strip that out and the LTM P/E is around 18x.
Still nowhere near mouth-watering appeal, sure, but not nose-bleed levels either, especially if you adopt the view that the next two or three financial years will see the virtuous combination of rising Revenue and Margins.
$12.00 is probably a touch overvalued still, but it is approaching fair value which I think is around $11.40 (derived by 10.0x EV/EBIT based on my sense of mid-cycle EBIT of $100m).
Anything below $11.40 is where I start buying and if it gets to $10.50 (which I doubt it will, unless something extreme happens in the world), then I'm buying on the front foot.
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(20min delay)
