Ann: Half Year Results Conference Call Details, page-2

MND result announced this morning, contains some insights likely to be of relevance to LYL, specifically in relation to:

1.)   How much project work is coming down the pipeline,

and

2.)   Capacity constraints in the industry

Point 1.) I suspect is largely confirmation of what is already widely known/expected in the minds of investors in this sector, but Point 2.) I think is only partially appreciated and the ultimate outworking of it not appreciated at all!

In summary, this taken from the MND Outlook section:



The self-evident part is the shortage of skills, but the "new" part  - certainly the first time I've heard management of this sort of company articulate it - is the bit about the company actively picking and choosing what work it does, and what it turns down.

It's quite a significant development, I believe, and on that wasn't even something that was expressed during the heady days of the commodity boom between 2010-2014.


If tried to capture this industry dynamic in the following post, made on the MND thread after its resutl announcement ( https://hotcopper.com.au/posts/66364570/single)  :


"It's not at all a good report, not just in terms of the dampened short-term outlook, but in terms of the core operating performance of the business.

In a nutshell, the following two pictures capture the essence of MND's problem (well, not just MND's but a problem for the entire engineering construction sector in Australia):



Despite Revenues having increased by some 50% since the bottom of the cycle (in around 2016/17), operating margins are currently only 70% of what they were back then.

So there has largely been an absence of any operating leverage during this cycle upswing, leaving nominal EBIT levels unchanged today compared to the cycle trough.

The reason for this is simple:  A hollowing out of the skills base over the decade since the last commodity boom."


This all largely relates to Point 2.), above, but as I suggested, the penny that I don't believe has dropped is the ultimate outworking of the capacity constraint across the industry, namely (continuing the MND post):

"Something will have to give, because this is unsustainable (I mean, if the best-of-breed guys are suffering, what kind of stress must the middle-ground operators and the "also-rans" be feeling?)

What will happen over coming years is two-fold:

1.) Industry margins will have to rise. Economic maxim - when demand for an service exceeds supply of that service, the price of that service increases. Early testimony to this dynamic is MND management saying it is going to cherry-pick what it sees as being the best (read "most profitable") projects.

2.) The capital cost of the various projects in planning in Australia - across all economic sectors - are going to soar, and indeed a big part of the wish list of projects will not be able to be built at all. The capacity to build it simply doesn't exist."


Like MND, LYL is one of the industry's most reputable operators.

Therefore, in a world where demand for the engineering design and construct services exceeds the available capacity, like MND, LYL will be in a position to be not only highly selective in the sorts of projects it takes on board, but also have the ability to exercise a degree of pricing power, something that has almost always been the exclusive purview of the clients of engineering construction businesses.

But the strength of bargaining position is fast moving from client to service provider.

.