A DECADE ago, engineering and construction contractor Monadelphous Group just made it into a listing of the state’s 50 largest companies, with a market capitalisaton of $71 million.
One year ago it had grown to become the state’s 14th largest company. This year it is ranked as the state’s fifth largest company, with a market cap of $1.9 billion.
That rise up the rankings has been built upon a remarkably consistent operational and financial performance by Monadelphous.
Almost every year without exception it has delivered improved results, making it a role model for competitors.
Another company that has risen rapidly up the rankings is gold miner Regis Resources.
It was ranked as the state’s 21st largest company one year ago; today it is ranked as the state’s seventh largest, with a market cap of $1.77 billion.
Led by chairman Nick Giorgetta and managing director Mark Clark, who achieved great success with Equigold, Regis seems poised for further gains (see Regis's pot of gold bolsters performance).
Monadelphous and Regis are the two most prominent examples of WA companies moving up the market cap rankings.
Copper miner Sandfire Resources is another – it has moved up nine places in the past year to be the state’s 14th largest company by market cap.
Oil and gas explorer Buru Energy made an even bigger jump. One year ago it was outside the state’s top 50 stocks, but now it is the 24th largest company in the state.
Silver Lake Resources was not far behind – it has also come from outside the top 50 to now be the state’s 29th largest company.
The challenge for these companies is to develop assets so they can deliver sustainable earnings growth for their shareholders.
That is something contractors such as NRW Holdings and Ausdrill have achieved, with both moving up the market cap rankings in the past year.
For all the companies moving up the rankings, however, there are others moving down.
Aquila Resources slipped a few notches as progress on its flagship West Pilbara iron ore development slowed, as did Seven West Media, formerly West Australian Newspaper Holdings.
Cashed-up iron ore miner Mount Gibson Iron (10th to 19th) and coalmine developer Coalspur Mines (20th to 41st) slipped much further down the rankings.
Another notable development was the change at the very top of the market cap rankings.
Wesfarmers, which achieved a small rise in its market cap to $34.6 billion, has regained its mantle as the state’s largest company.
Woodside, which held that title for the past few years, has slipped to a long second, with a market cap of $25.5 billion.
This is a big change from just a few years ago. In 2007, Woodside was number one with a market cap of $31.1 billion while Wesfarmers was a distant second with a market value of $17.7 billion.
It’s worth noting that the growth in Wesfarmers’ market cap since then has very little to do with its share price, but is largely a product of new share issues undertaken to support its acquisition of retailer Coles, which is slowly delivering better results but not enough to deliver the return on capital that Wesfarmers consistently achieved in the pre-Coles era.
Brokers’ favourite
Monadelphous is a rare example of a company that has been able to combine growth in the size of its business with growth in rates of return.
Led by chairman John Rubino, who played a lead role in establishing and building United Engineering (now UGL Limited) before taking charge of Monadelphous, and long-serving managing director Rob Velletri, the company’s share price touched an all-time high just above $24 early this year.
Currently trading at about $22, Monadelphous has been a favourite stock for brokers and analysts. For brokers, the question is not whether Monadelphous will deliver good results, but whether its share price represents good buying value.
The company’s strong performance was highlighted by its record results in the half-year to December 2011.
Monadelphous reported a record net profit of $57.5 million (up 26.3 per cent) on revenue of $879 million (up 25.6 per cent).
Contract announcements in recent months signal the company’s growth trajectory.
In May, it announced $150 million of new construction contracts for clients including BHP Billiton, for its Macedon gas project near Onslow, and for Rio Tinto, for pipelines to a new power station at the West Angelas iron ore mine.
In April, Monadelphous announced $220 million of construction and maintenance contracts, for Rio Tinto’s iron ore business, for Woodside at its Pluto LNG project, and for Chevron at its Barrow Island operations.
Importantly, it also won extra work in Queensland through its Monadelphous Muhibbah Marine joint venture, which is working on the Wiggins Island coal export terminal.
This joint venture was an example of Monadelphous’ gradual and mostly successful diversification strategy, in this case into the marine construction sector.
The West Angelas contract was another example. It was won by Monadelphous’ KT Pipeline Services subsidiary, bought two years ago, in a joint venture with specialist pipeline engineering company OSD Pipelines.
Patersons Securities analysts David Gibson has described these contract wins as further evidence of the company’s “unrivalled execution track record in the mining services sector”.
With an ability to manage labour shortages and a tier-one client base, Mr Gibson believes the company has a good outlook.
“Despite trading at a large premium to the resource services sector, we believe this is justified given MND’s strong earnings history, high return on equity, competitive position and low relative asset intensity,” he said in a research note.
Deutsche Bank analyst Craig WongPan also speaks highly of the company, citing its strong relationships with the major miners, a strong management team, strong record for project execution, and a superior return on invested capital.
“We believe the market is undervaluing the company’s high level of contracted sales and the current exposure to projects which are unlikely to be deferred,” Mr WongPan said.
For a full set of TSR data on all WA companies, go to http://www.wabusinessnews.com.au/total-shareholder-returns.
