Schroders on Monadelphous

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"We recently initiated a material position in Monadelphous (MND). Clearly this is a counter-cyclical play due to the negative sentiment in the mining sector, and in particular oil and gas capex declining from unsustainable levels. There is an expectation that MND will be collateral damage due to its perceived reliance on construction, however, we note the industry is morphing from construction to an operating phase. Its main competitors are struggling under the burden of heavy indebtedness and legacy contracts afflicting cash flow generation, the lifeblood of a contracting business. MND on the other hand generates strong cash flow (always has) and is regarded as having the best risk management practices in the space. The increased skew of earnings to operations and maintenance we think provides a more sustainable and lower risk earnings profile that has greater intrinsic value than in its previous cyclical construction led earnings. MND is without question the best managed company in the sector and its healthy balance sheet accords it a significant competitive advantage that is unappreciated." (Source: Matthew Booker, Portfolio Manager, Smaller Companies at Schroders)

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