Judging by the fourfold rise in the share price, I’m about 5 years too late to the Monadelphous party. I listened in on the 2010 results presentation, though, and recently met with the management team in person. I like what I see.
The first thing I noticed is that Managing Director Rob Valletri and Chief Financial Officer Zoran Bebic are open and knowledgeable but, like Wal King, don’t go out of their way to pander to the investment community. Many analysts and fund managers are simply trying to glean a piece of information that will give them an insight into whether the next reported profit number will be better or worse than the market is expecting. So they ask questions like: ‘your EBITDA margin fell by 20 basis points [0.2%] over the past six months, is that because you are writing less profitable contracts in a more competitive market?’. Or ‘other market participants are saying that the big miners will all announce their spending plans around October, will that give you more clarity on the coming 12 months?’.
With a perfect poker face on, Valletri answered the first of these questions with ‘I wouldn’t read too much into it’ and the second with ‘yes, that’s the way the cycle typically works. We’ll let you know more at the AGM’. The fishing expedition produced about as much as a typical Bristlemouth fishing trip (the local fish and chip shop is guaranteed some business).
At the recent in-person presentation, Valletri expanded on the margin issue. Each contract is different, he pointed out. Sometimes they’ll price aggressively upfront to win the contract in the expectation there will be a substantial amount of follow-on work. Sometimes they don’t think there is much competition and they’ll price the bid with substantially more fat. The average margin at the end of any 12 month period is a blend of many different factors and 20 basis points is neither here nor there in the grand scheme of things (this is true of most businesses, but it doesn’t slot nicely into an excel model).
Of most interest to me was a 15 minute discussion around the ‘Monas culture’, as Valletri described it. This company doesn’t take price risk on its contracts. Either it has its costs locked in before it bids, or the contract contains a mechanism to pass on any price increases. Why, I asked, do the likes of BHP and Rio use Monadelphous at all if the miners keep all of the risk and pay Monadelphous a margin? What they get, management explained, is project delivery on time and injury free, every time. They also get a supplier that doesn’t sue them and genuinely values the relationship (‘we don’t sue our customers’ is apparently a part of one of Monadelphous’s core values).
Delivering exceptional service is easily said, difficultly done. And for Monadelphous, Valletri explained, it all comes down to the 150 or so staff at the core of the company’s 5,400-strong workforce. ‘You don’t incentivise people with money’, Valletri explained, ‘you incentivise them with purpose and a shared vision. When you have a culture like this, that’s your organic growth. You don’t need acquisitions to grow’.
Most CEOs and senior managers know how powerful a culture like this can be, and that success often breeds success. Monadelphous looks a rare exception in that it’s actually been able to create it. The share price is a tad rich for mine but this is definitely one for the watch list.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.