Monadelphous plans $100m spend

Monadelphous Group is looking to spend up to $100 million on an acquisition to strengthen its maintenance and services business.

Managing director Rob Velletri said the company was targeting industry sectors where it was not strong, such as the Queensland coal industry, and water and power infrastructure.

“We’re looking at businesses that may help us get into those markets via an acquisition,” he told WA Business News.

“We’ve got some people we’ve specifically hired looking at that.”

Chairman John Rubino said Monadelphous’ strong balance sheet and its ability to raise new capital meant funding was not a real constraint.

“We could buy something tomorrow that could cost $100 million,” he said.

“The limitation is how easily it can be integrated and how much we can add to it.

“It has to make sense, something that can be absorbed without affecting everything else, and we need to be able to improve what we are purchasing.”

The company’s search for acquisition opportunities follows four years of rapid growth, which has tripled its annual turnover to $390 million.

The growth has been led by its engineering construction division, which now accounts for 62 per cent of revenue.

“That’s on the back of the huge amount of work that’s out there and the development of our capability to handle large construction projects,” Mr Velletri said.

Monadelphous has worked on many of the biggest resource projects across Australia, including Rio Tinto’s iron ore expansion, BHP Billiton’s Ravensthorpe nickel project, Burrup Fertilisers’ ammonia plant, Comalco’s bauxite operations in Queensland and Xstrata’s Rolleston coal project.

It recently won further work in the booming iron ore sector, securing a $65 million contract with BHP Billiton.

The construction division is inherently cyclical, whereas the maintenance and industrial services division (38 per cent of revenue) provides a more stable, recurring income stream.

Monadelphous’ maintenance division achieved strong growth last year, working for clients such as Comalco, BHP Billiton, Alcan, Chevron, Worsley Alumina and Rio Tinto’s HIsmelt plant.

It also operates Skystar Airport Services, which provides ground-handling services at airports and represents a diversification of the company’s activities.

The division’s sales grew by 26 per cent, but this was outstripped by the growth of the construction division.

Mr Velletri is positive about the company’s overall outlook.

“Workload levels are expected to at least continue at current levels for the 2005-06 financial year, and the outlook is strong for the next two to three years,” he said.

The company’s strong performance has underpinned big increases in its share price over the past two years.

Its shares briefly hit a high of $4.50 and are currently around $4, but that is still a little higher than most analysts’ valuations.

Patersons Securities analyst Benn Skender expects good margins and high capacity utilisation to continue, but he believes this will be offset by the difficulty of attracting enough skilled labour to grow capacity (and hence profits) to justify the current share price.

He expects revenue will increase 14 per cent to $444 million and net profit will rise by 12 per cent to $18.8 million in the 2006 financial year, and that growth will slow further in the 2007 financial year.

Mr Skender agrees with the company’s growth strategy by noting that it needs to acquire scale in the maintenance and industrial services division “to build a more robust longer-term earnings profile”.

Bell Potter Securities analyst Matthew Ward is more bullish, forecasting revenue to rise 17 per cent and net profit to rise 21 per cent this year.

“This assumes that strategies to grow the labour force are successful,” Mr Ward said.

Mr Velletri agrees that the shortage of skilled labour in Australia is the biggest constraint facing the company.

“We could get a hell of a lot more work than we take on,” he said.

“We restrict what we take on by the capacity that we have and the people that we have.

“We are very fussy about the people that come into the business.”

The company has recruited a handful of staff overseas and is currently looking to recruit staff in the UK and South Africa, but will continue to be very selective.

Mr Velletri said a big constraint was finding recruits with relevant industry experience.

In terms of retaining staff, Mr Rubino said Monadelphous was not the top payer in the market, and focused more on its company culture and support for its staff.

“I think our environment is such that people love to work,” he told WA Business News.

“They want to be part of a successful company but its more than that, they have to get the personal satisfaction.”

Mr Rubino said the staff shares scheme also played a role in rewarding and retaining senior staff.