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December, 2017 3:09 PM



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Engineering and construction stocks on a roll

Engineering and construction stocks on a roll

By Bob Kohut 13.11.2017


Engineering and construction companies serving the booming mining sector roared upward on the back of the spectacular rise in mining investment that increased more than fourfold between 2004 and 2010, from $9.7 billion to $40 billion; followed by a doubling of capital investment from the 2010 $40 billion to $94 billion in 2012.  By the March Quarter of 2013 the boom seemed at an end, as mining capex fell 6.2% in that quarter, decreasing by $1.47 billion. 

The share price of two of the biggest mining services providers on the ASX – Monadelphous Group Limited (MND) and WorleyParsons Limited (WOR) – got crushed.  Here is a five-year price movement chart for the two companies.

 

The rebound in share price commencing in early 2016 suggests the Engineering and Construction Sector is healthy once again, and the Performance of Construction Index (PCI), produced by the Australia Industry Group (AI) and the Australian Housing Industry Association (HIA) provides evidence.

The PCI measures activity levels across the construction sector monthly.  A reading above 50 indicates improvement while readings below 50 indicate a weakening in construction activity.  The index has shown readings above 50 for nine consecutive months.

 For the October report an Ai Group spokesperson stated, “Engineering construction was again the strongest performing area with its rate of expansion at a 10-year high on the back of rising levels of non-mining infrastructure work.”

Within the ASX engineering and construction sector there are seven stocks whose share price is up more than 50% year over year.  The following table lists the stocks by market cap with share price performance over the last five years.

 

The average annual rate of total shareholder return over five and three years shows how much these stocks have rallied from the dark days of 2013.  It is interesting to note that the two stocks with the lowest percentage improvement year over year did not suffer as much from the fall of the mining boom.

The explanation seems to lie in the historical level of diversification of the two companies.  Cimic Group Limited (CIM), one of the largest engineering and construction firm on the ASX, changed its name to CIMIC (Construction, Infrastructure, Mining and Concessions) from Leighton Holdings, an iconic Australian name for more than 60 years.  The company is international in scope with a well-diversified base of project activities.  The company website lists total projects by classification:

•    Engineering and infrastructure    128

•    Building and property         79

•    Mining and resources         67

•    Operations and maintenance     24

•    Mineral Processing         17

•    Public Private Partnerships     4

The stock price began rising as the company reported its Full Year 2015 Financial Results, with the first evidence of a turnaround in the FY 2014 loss of $114 million to a profit of $505 million, although the 2015 loss was attributable to an impairment charge. In 2016 the company reported an 11.5% increase in net profit despite an 18% fall in revenue.  The Half Year 2017 Results showed the turnaround in full force with revenues up 28% and profit up 22%.  Cimic pays a fully franked dividend with a current yield of 2.3%, forecasted to grow by about 12% over the next two years.

RCR Tomlinson Limited (RCR) has been in business for more than a century and currently operates in three areas – Infrastructure, Energy, and Resources.  As evidence diversification spared RCR the major pain of the collapse in mining investment, the company’s FY 2016 Financials showed 57% of the company’s revenues coming from its Infrastructure operations, with projects ranging from rail and roads to water and transport.  The Energy operations contributed 17% to total revenue with the remaining 26% coming from projects in the Resources sector.  In FY 2017 the company’s revenue eclipsed the pre-decline levels and net profit came in at $25.7 million, a vast improvement over the 2016 loss of $16.2 million.

RCR, like the other engineering and construction stocks in the table, has a lofty P/E (Price to Earnings Ratio), but the company’s current projects include seven solar farms, one wind farm, and five water and waste treatment operations.  The company pays an unfranked dividend with a current yield of 1.3% but analysts expect the FY 2017 dividend payment of $0.06 per share to increase to $0.122 by FY 2019.

The smallest firms in our table by market cap – NRW Holdings and Macmahon Holdings -- have both seen share price increases year over year exceeding 100%.

NRW Holdings Limited (NWH) had seen its share price rising modestly in the first half of 2017 when the August acquisition of another mining services provider to add to its stable of companies sent the stock price skyrocketing over 40% in a matter of days.  Within a month the acquisition bore fruit, as the acquired company, Golding Contractors, was awarded a contract at the Broadlea Open Cut Coal Mine.  This comes in addition to Golding’s existing work schedule totaling $275 million for FY 2018.  NRW management claims the addition of Queensland based Golding could increase the company’s total order book to as much as $1.4 billion.

NRW has deep roots in the mining sector but is actively seeking diversification into other commodities, clients, and locations.  The Full Year 2017 Financials for the company were solid with double digit increase in both revenue – up 28.6% -- and profit – up 33%.

Macmahon Holdings Limited (MAH) is strictly in mining services business, offering engineering, drilling and blasting and other services for both surface and underground mining as well as plant and maintenance services.  The absence of diversification crushed the stock price over the last five years.

The stock price surged in late January of 2017 when market leader Cimic, an existing shareholder in MAH, announced an offer of $0.145 per share to acquire the entire company, propelling the MAH share price upward in a move that has continued throughout the year. 

In less than one month, Macmahon announced it had signed a three-year agreement with Indonesia’s PT Amman Mineral Nusa Tenggara (AMNT) in the hopes of expanding into that country.  By July Cimic had sold out of MAH completely and the deal with AMNT was finalised. The agreement calls for AMNT to acquire a 40% to 50.1% interest in MAH along with the sale of equipment to MAH and a partnership arrangement on an Indonesian copper/gold mine Macmahon claims could generate $2.7 billion in revenue over the 14-year life of the mine, with the possibility of more revenue pending the outcome of two other developments in the area.

The deal may be tantalising investors, because Macmahon’s Full Year 2017 results were abysmal, at best.  The company posted a mammoth loss of close to $220 million in FY 2015 before posting a small profit of $1.7 million in FY 2016.  Revenues declined 42%.  For FY 2017 the company saw a modest increase in revenues of 3.4% but went back into the red with a $22.8 million-dollar loss.

Ausdrill Limited (ASL) is another near pure-play mining services provider whose share price has been moving upward since the start of 2016. After reversing a $175.6 million-dollar loss in FY 2015 the company went profitable again in FY 2016, only to see the $58.2 million fall to $31.2 million in FY 2017.  However, the FY 2016 number was “reported” net profit.  For FY 2017 Ausdrill is claiming a 53.2% increase in “profit from continuing operations, due to asset sales during the year.

The company pays a fully franked dividend with a current yield of 1.6% and is growing its presence in its African operations, which now includes six African gold mines.

Monadelphous Limited (MND) was once one of the hottest mining services provider on the ASX; now rising from the ashes like the other stocks in our table.

 Monadelphous takes on major projects, priding itself on its ability to service the “biggest and most complex projects and facilities.” The company identifies six core markets:

•    Iron Ore

•    Oil and Gas

•    Mineral Processing

•    Coal

•    Water

•    Power

Monadelphous has two operating divisions, Engineering Construction, and Maintenance and Industrial Services.  Although the company’s principal operations are here in Australia, MND also has operations in New Zealand, China, Papua New Guinea, Mongolia and the United States. The company has adopted a strategy of diversification in its services offered and markets served, entering the renewable energy market with its first wind farm project in 2017.  Monadelphous is also expanding its presence in the infrastructure market with new contracts in water and irrigation projects and entering the Australian civil transport market.

Both profit and revenue have declined in each of the last three years, with FY 2016 revenues of $1.35 billion falling to $1.26 billion while profit declined from $67 million to $57.5 million.

The disappointing FY 2017 results announcement was tempered by MND management’s expressed confidence that their resource and energy markets had stabilised, and the company expected continued growth in revenues from infrastructure projects and overseas operations. While Monadelphous remains on the ASX Top Shorted Stock List, the company has dropped to 27th place on the Top 30 List as shorts exiting their positions have dropped the short percentage to 7.55%

WorleyParsons Limited (WOR), like Monadelphous, takes on big projects with their experience in engineering, procurement, and construction, making them a “start to finish” services provider.  The company serves the hydrocarbons, mineral, metals, chemicals and infrastructure sectors. WorleyParsons is international in scope with a vengeance, operating in 42 countries with 106 offices around the world, with an expansion into the UK’s North Sea oil market underway through a recent acquisition.

The company has seen positive results from its cost savings strategies, with a reported drop in costs of $500 million, besting the company’s target of $300 million. The Full Year 2017 Financial Results showed a decline in revenue, but profits rose from $23.5 million in FY 2016 to $33.5 million, following a disastrous result in FY 2015 – a loss of $54.9 million. 

Company management also expressed confidence in the future, stating:

•    Demand for energy and resources continues to increase, while investment to meet that demand into the future has declined significantly in recent years.  However, many of our customers are now indicating that they are returning to modest capital and operational expenditure growth albeit in an environment of uncertainty. 

 



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