Yet another downgrade/warning from the mining services and construction sector, with Perth-based Monadelphous Group (MND) telling shareholders at yesterday’s AGM that revenue and earnings will be down on the record 2012-13 year.
Given that the company’s share price has already reacted with a plunge this year of around $10 since January to $17.92 yesterday, the AGM warning was a case of catch up by the company, to the market which had already picked up from earlier suggestions from the company that 2014 would be tougher.
Monadelphous CEO Rob Velletri suggested in August’s report that repeating the 37% jump in revenue (to $2.61 billion) would be remote in 2014 because of the emerging slowdown in spending.
Yesterday he warned shareholders not to expect a repeat of the 46% surge in revenue (to $1.3 billion) seen in the first half the 2012-13 year, and to expect a second half slowdown in the six months to next June.
"Over the latest financial year, market conditions in the mining and minerals sector progressively and significantly tightened as customers pulled back and reassessed their capital expenditure plans and focused on optimising asset performance and reducing costs," Mr Velletri said.
"Customer sentiment has changed from an aggressive growth focus to an efficiency focus as commodity prices have normalised in a rising cost environment.
"With margins under pressure from a more competitive environment, the Company continues to focus on efficiency improvements and cost reductions.
"Consolidation of our fixed cost structure through the restructure of our operating divisions is having a positive impact on productivity and overall, our cost reduction strategies to date have delivered savings in overheads of approximately $15 million per annum.
"Prospects from committed and planned resource developments in the iron ore and oil and gas sectors will continue to provide construction opportunities for Monadelphous in the current financial year and beyond. In particular, the large volume of committed LNG projects moving into the mechanical and electrical phase of construction will provide significant construction prospects over the next few years.
"The maintenance service market remains robust as new resource development operations come on stream. While maintenance services volumes are under pressure from mining and minerals customers, volumes in the oil and gas market are expected to grow as new LNG projects move to the operating phase.
"The Company has begun the year with a solid workload with revenue levels in the first half expected to be similar to the previous corresponding period."
MND TYD – Monadelphous warns on tighter margins
Mr Velletri warned that revenues "are expected to soften in the second half as a number of projects reach completion".
"As I have mentioned, the level of bidding activity remains high with a number of significant tenders still to be awarded. Construction revenue flows will be dependent on the size and timing of new contract decisions, some of which are anticipated in the coming months.
"The Company’s leadership position in its core markets of resources and energy and continued development of its diversification strategy will support long-term growth. Opportunities for expansion in existing infrastructure markets of water and power and longer-term market diversification, including new services and geographical expansion for existing customers will continue to be pursued," he added.
Despite these cautionary words, Mr Velletri didn’t give any guidance on earnings.
Monadelphous earned a net profit of $156 million in the year to June, up from $137 million in the 2011-12 year.
The first half saw a 37.5% jump in net earnings to $79.1 million.
Given the tenor of the comments to yesterday’s AGM, reaching that figure in this half year is going to be very, very tough.
The big question will be how much of its profit margin does Monadelphous keep as it tries to keep revenue growth buoyant. The CEO has warned that margins are under pressure because of the downturn.
That seems like a big warning, especially for the second half when winning new contracts to replace those that have finished, might be tougher without cutting margins.
