Two outstanding mid-caps come into view

Mobile home provider Fleetwood and resource services group Monadelphous are suddenly worth closer examination.

PORTFOLIO POINT: Investors should keep a close watch on Monadelphous and Fleetwood. If their premiums to intrinsic value decline they may present attractive opportunities.

Two of the highest-quality Australian listed companies, with exposure to the resource sector, may present attractive opportunities for the ready-to-aim investor, should their 20% premiums to intrinsic value decline and the hiccups in China lead to lower prices here.

First to China, the country many expect to bail out the US and Europe. A rapid deceleration of growth in China is being observed and cyclical industries appear to be bearing the brunt. Tightening liquidity conditions are leading to restrictive lending policies in housing, and steel making capacity is being cut by plants being closed for “maintenance”. The flow-on impact, of course, is a big hit to public confidence in banks because of poor asset quality. At the same time, housing starts are declining and in some places house prices have fallen as much as 30%!

One report also noted confirmation from listed companies. Zoomlion, China’s second largest manufacturer of construction machinery, was quoted as saying: "Demand for construction machinery has shrunken drastically and growth will no doubt continue to slow next year."

Steel inventories have been run dramatically lower by steel makers who probably know the state of the market better than anyone, while iron ore stocks at port are building up. Many believe the writing is on the wall.

If they are right – and I am not one to predict these things – lower prices for Australian miners and mining services companies may be just the trigger we need to pick up extraordinary companies below intrinsic value.

Fleetwood (FWD) and Monadelphous (MND) are two companies that have earned a reputation for excellence, by all stakeholders including clients and shareholders.


Listed since 1991, Monadelphous (Quality Score A1) is a leading Australian engineering group providing construction, maintenance and industrial services to the resources, energy and infrastructure sectors, building, maintaining and supporting their client’s operations.

As the chart shows, its share price has rallied strongly after touching intrinsic value. Conventional analysts are also expected to pull back their recommendations because price/earnings multiples are now about 17 times.

Over the long term, the company has been a stellar performer. Cash from operations has amounted to $646 million since 2002 (during which profits have risen 20-fold) and only $73 million of that has been required to be reinvested in the business. That has meant more than $573 million has been accumulated for distribution and since 2002 Monadelphous has distributed $342 million in dividends.

This superior economic performance is reflected in the share price, which has risen from 40¢ in 2002 to $21 recently.

At the recent AGM the company predicted revenue growth of 15% and solid margins. The confidence stems from winning almost $900 million of new work since June 30. Net profit is expected to grow to $110 million from $95 million. This is a near doubling of profits since 2007, but since then – despite debt rising from $27 million to $43 million last year – returns on equity have been declining, from 78% to a forecast 52% in 2012.

More importantly as the company expands (it is forecast to generate revenue of $2 billion in 2014, up from $1.4 billion last year) the high earnings growth rates of the past will be more difficult without the assistance of acquisitions. We don’t like acquisition-generated growth as much as organic growth, so this combined with indigestion of earnings growth is another reason the patient and conservative value investor should wait for large discounts to intrinsic value before considering a position even in this truly A1 business.


Fleetwood (Quality Score A1) provides mobile accommodation for retirees, caravaners and resource and mining companies and has been listed since 1987.

If you have ever seen a Coromal or Windsor caravan or those hard fibreglass canopies – often with windows – sitting atop the back of a ute, you will know Fleetwood’s products if not the company itself. It makes recreational vehicles (caravans – weak consumer sentiment has not dented production which is not meeting demand) and accommodation (dongers and portable housing and classrooms).

I have personally experienced Fleetwood’s eventful share price over the years having bought and sold the shares of this company profitably several times.

For some time the company’s fortunes, or at least sentiment towards it, has been dominated by the outlook for its biggest project, the Searipple portable accommodation Village for Woodside Petroleum. The village’s dominance on prospects is a function of the fact that it contributes about 75% of divisional earnings at 50% margins. Contracts signed with Rio in July, and with BHP in September, effectively soak up capacity created by reduced requirements from Woodside.

The second and third trains of Woodside’s Pluto liquefied natural gas (LNG) project in Western Australia may support revenues and profits as will any other projects that commence in the Karratha region. The WA company is also expanding into Queensland, but contributions to earnings are not expected until 2013.

Over the past decade Fleetwood has produced cash flow from operations that exceed the $264 million of reported profits by $100 million. After $180 million was reinvested, the company has accumulated $184 million, of which $177 million has been distributed by way of dividends. Return on equity in 2002 was 31% on $48 million of equity. In 2011 the company generated 27% on a whopping $181 million of equity. In other words, it appears management are profitably employing the retained profits.

Sadly, despite the business’s A1 economic performance, intrinsic value has not grown as fast as it could have over the years. This is more than partly due to the fact that shares on issue have grown more than 55% since 2002, or by 21 million shares to 57.8 million. Meaningful beneficiaries of this benevolence have been directors Stephen Gill and Greg Tate. In October 2002, Gill had 307,308 shares at $2.50 each and Tate 184,398.

Today Gill holds almost 3.1 million shares and Tate almost 7 million shares at $12 thanks to options exercises, dividend reinvestment plans and perhaps on market purchases – although these numbers are net of on-market sales that have occurred along the way. For Tate, a $460,000 stake in 2002 has mushroomed to almost $83 million today (remember that excludes the sales of shares made along the way). Not many other shareholders would have experienced those returns. So much for alignment with shareholders!

That aside, as can be seen from the chart, Fleetwood, like Monadelphous needs also to experience a decent share price slide before it represents good value and if China’s hiccoughs turn into a cold, seekers of A1 businesses may just get their wishes.

Roger Montgomery is an analyst at Montgomery Investment Management. Skaffold can now be purchased from

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