Our top 3 engineering and construction stocks are:

MONADELPHOUS (MND)

MND is a premier Australian provider of Engineering Construction (EC) and Maintenance & Industrial Services (M&IS) to blue-chip clients in the resources, energy and infrastructure sectors. Through a conservative management style, MND has retained a net cash position above $100m since FY08 and paid a fully franked dividend every year since 1994.

With Australian resources production reaching record levels, MND has seen strong revenue growth in its M&IS division of ~52.9% since FY17, with it comprising ~62% of FY19 group revenue. M&IS provides recurring style revenue with most contracts awarded under multi-year agreements.

Additionally, MND’s construction division is set to benefit from Australia’s iron ore majors committing to ~US$11.4bn of new projects, with MND currently having won ~$312m of work on BHP’s South Flank and Rio Tinto’s West Angelas projects.

LYCOPODIUM (LYL)

Having completed over 5000 studies and 300 projects in over 55 countries, LYL has proven itself to be a premier provider of full life cycle minerals processing services across a wide array of commodities, including Gold, Copper, Graphite, Lithium, Iron Ore, Nickel, Mineral Sands and Diamonds.

By establishing repeat relationships with numerous clients, including Rio Tinto, BHP and Newcrest, LYL has amassed a ~$60m net cash balance, representing ~28% of its market cap at a share price of $5.40.

Being particularly leveraged to gold, LYL is set to benefit from any continued strength in the gold price, which is likely to drive demand for new studies and projects. In addition, LYL’s Mondium JV with MND, which is targeting large-scale Australian EPC projects, is continuing to gain market traction, as evidenced by winning a ~$100m contract from Talison Lithium in May 2019.

On a trailing dividend yield of ~5.6% and BP forecast FY20 yield of ~5.9% (based on a $5.40 share price), LYL provides a rare opportunity for investors to both gain exposure to a rising gold price, and earn a strong income.

SERVICE STREAM (SSM)

Across its Telecommunications and Utilities segments, SSM provides outsourced services to Australia’s telecommunications, gas, electricity and water utilities with an impressive list of blue-chip customers which include NBN Co, Telstra, Sydney Water and APA Group.

The Telecommunications segment comprises Fixed Communications (completing nbn activations & maintenance) and Network Construction (now primarily focused on wireless mobile towers).

The Utilities segment comprises Energy & Water (meter reading and replacement, commercial solar installations, and electrical inspections) and Comdain Infrastructure (end-to-end engineering construction and asset management services to the water and gas sectors on Australia’s east coast).

SSM has a strong track record, having delivered 12 consecutive halves of profit growth and tight working capital control that routinely sees it deliver strong operating cash flow conversion. Despite a wind-down in nbn construction work, SSM’s long-term relationships with key clients in defensive industries should help it to continue delivering solid operational performance in the years ahead.

Authored by Steven Anastasiou – Research Analyst at Bell Potter Securities, 17 December 2019
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Disclosures:
Monadelphous (MND):
Steven Anastasiou holds a long position in MND.