MND 5.67% $10.98 monadelphous group limited

Peak-cycle multiples on trough earnings

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    When it comes to deeply cyclical businesses, such as MND, conventional investment theory - backed by empirical evidence - says that their valuation multiples should be lower at, or near, the top of the cycle (as the market anticipates the slowing earnings in coming periods), and the valuation multiples should be higher during periods of cyclical lows earnings (as the market anticipates recovery in earnings).

    Looking at its EBIT over time (the top chart) and the EV/EBIT multiples (the bottom chart), MND can be seen to be "behaving" reasonably well, according to the theory:


    As can be seen - if only generally and acknowledging that the time frame is generally limited in terms of cyclical history - when EBIT is high (2012/12/14/15), the EV/EBIT multiple is generally lower (averaging around 7.6x over that period), and when earnings are low (2005/06 and 2017/18/19) the EV/EBIT multiple is generally higher (averaging almost 12x in 2005/06, and around 13.5x across 2017/18/19).

    Of course, there are times when reality does not accord with valuation theory; for example in 2009 (GFC-impacted), and in 2016 where there was also a disconnect in the relationship (although if I knew why at the time, I've since forgotten.)

    The point that warrants making is that both those times of "disconnect" proved to be sensational buying opportunities, with the share price subsequently almost trebling over the following two years.

    Bringing the focus to where we are today:  almost certainly at cycle-bottom earnings, but with a valuation multiple which is a good 30% to 40% lower than where theory, and precedent, says it should be.

    So, not the makings of a trebling share price to come, but approaching the point were there residual downside is removed.

    I duly resumed buying today.


    To put this exercise into context, "Current" EBIT of around $75m is based on an estimated $32m EBIT result for JH2020, which would be down 24% down on DH2019's $43.3m and 15% lower than on JH2019's $37.9m figure... noting that, for emphasis, JH2019 itself was the weakest profit result for MND since 2006!.

    See graphic of half-yearly figures to get a sense of the extent to which the company is under-earning at the moment:


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Last trade - 15.04pm 04/03/2021 (20 minute delay) ?
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