Outlook for engineering and construction stocks

  • Feb 02, 2020 AEDT
  • Team Kalkine
Outlook for engineering and construction stocks

The performance of construction in Australia over the period to 2023/24 is expected to be relatively flat, but there will be substantial changes within the different sectors and geographic markets. The fundamentals of the market like population, employment and interest rates are sound, but several microeconomic obstacles are holding things back. The volume of construction peaked back in 2012/13 and fell by 14.3% until its low point in 2016/17. Some, but by no means all, of the lost ground has since been recovered. Over the medium term, the size of the market in 2023/24 is expected to be 2.6% lower than that in 2018/19. Government-led projects mean that transport infrastructure will be one of the strongest performers but prospects for new home building are more mixed and some areas of commercial building will be finding it tough to operate in the coming years.

Let’s now look at two engineering and construction companies and their outlook for future.

Monadelphous Group Limited (ASX: MND)

Monadelphous Group Limited builds, maintains and improves its customers’ operational efficiencies through safe, reliable, innovative and cost-effective service solutions. The company has two operating divisions working mainly in Australia, with overseas operations in China, New Zealand, Mongolia, Papua New Guinea, the Philippines and the United States.

MND’s JV Secures Major Engineering Procurement Construction Contract with Rio Tinto as partner

Mondium Pty Ltd an incorporated joint venture in which Monadelphous Group Limited is a 60 per cent shareholder, has been awarded a large contract, worth around $400 million, with Rio Tinto as partner for the construction and design of WTS2 mine, located in Western Australia in the Pilbara region.

Mondium will carry out all EPC work linked to the WTS2 development, including the overland conveyor, process plant and non-process infrastructure.

Industry Outlook

The energy and resources sectors in Australia are anticipated to deliver a strong pipeline of prospects soon as more promising market conditions return. Project growth activity has been growing with numerous resources construction occasions available in the market, mainly in the lithium and iron ore sectors. Chances from additional growth in LNG production are also anticipated to be encouraging in coming years. Maintenance activity in the resources market is anticipated to be robust as production levels in Australia remain at record levels. Customer focus on improving production and productivity levels will persist to augment demand for continuing support of maintenance work and associated capital expenditure. Investment in infrastructure remains strong, and with the company’s track record of delivery of quality projects in this market, opportunities in both renewables sector and water and will continue to augment growth options.

Future Growth Prospects of the Company

While growth prospects over the longer term are positive, several construction opportunities are transitioning to the execution stage later than expected. Sales revenue growth for the 19/20 financial year is dependent on the timing of progress on the work secured, as well as the value and timing of future contract awards. It is anticipated that revenues in the current year will show progressive growth and be skewed towards the second half of the year. Revenues in the first half of the 2020 financial year are expected to be up on the second half of last year, and like what happened in the previous corresponding period. Price sensitivity, intense competition in the market and customer requirements of cost-efficient delivery will continue to challenge margins. The retention of high quality talent remains a key area of focus for the company, with increased activity in the industry leading to enhanced shortages in the skilled labour market.

Stock Performance

The stock of MND closed the day’s trading at $17.570 per share on 31 January 2020, down by 1.403% from its previous closing price. The company has a market capitalisation of $1.68 billion as on 31 January 2020. The total outstanding shares of the company stood at 94.39 million, and its 52-week low and high is $14.560 and $20.070, respectively. The company has given a total return of 15.79% and -6.26% in the time period of 3 months and 6 months, respectively.

Seven Group Holdings Limited

Seven Group Holdings Limited (ASX: SVW) is a diversified operating and investment group which comprises wholly owned industrial operating businesses, oil and gas alongside key strategic investments in media and industrial equipment hire.

Performance in FY19

FY19 was a successful year for the Group, with robust, sustainable growth in revenues and underlying profit. Revenues were up by 27 per cent to $4.1 billion and group EBIT on a continuing operation increased by 40 per cent to $695.1 million, with growth achieved across all business segments. Statutory NPAT of $219.2 million was impacted by the group’s share of results from Seven West Media.

Key Highlights:

  • Industrial services EBIT grew by 40% reflecting strength of end markets in mining and infrastructure;
  • Beach delivered record production and earnings result, enabling reinvestment from strong cash flow and $172 million net cash;
  • EBIT was up $198m on prior corresponding period, delivered through WesTrac ($83 million), Coates Hire ($54 million) and Beach Energy ($85 million).

Key Financials (Source: Company Reports)

Outlook for FY20

The company’s Industrials businesses are well placed to benefit from the mining production cycle and the continued investment in infrastructure. Westrac plays an important role in providing solutions to the world’s largest miners and continues to find ways to deliver superior customer service, whilst at Coates Hire, the company is focused on optimising the branch network and asset fleet to ensure customers have access to the right equipment at the right place and time. In Energy, investment in Beach Energy is led by a highly capable management team operating a quality set of assets and exploration opportunities, whilst at SGH Energy, momentum on the Crux LNG Project continues to build and the company is confident of achieving a valuable outcome for the Group over time.

SVW has maintained its balance sheet strength with reported net debt now below $2 billion and adjusted net debt near $1.7 billion after adjusting for the mark-to-market values of hedged positions and the market value of listed investments. This positions the company to ensure the next wave of expansion through reinvestment in current businesses and new prospects. The Industrial services and Energy businesses are well placed for further growth, as they persist to benefit from the strong medium to long term outlook for mining assets, investment in infrastructure, and domestic energy. Considering the above factors, the company expects FY20 underlying EBIT growth to be in the mid to high single digits against FY19 underlying EBIT including the impact of accounting under AASB 16.

Stock Performance

The stock of SVW closed the day’s trading at $20.210 per share on 31 January 2020, up by 0.198% from its previous closing price. The company has a market capitalisation of $6.84 billion as on 31 January 2020. The total outstanding shares of the company stood at 339.36 million, and its 52-week low and high is $14.930 and $21.960, respectively. The stock has given a total return of 5.88% and 8.73% in the time period of 3 months and 6 months, respectively.

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