Full-year results from the Human Screen

The Human Screen would like to go on an African adventure but mining engineering contractor MDM engineering may not be the vehicle.

Highlights

• Return to operating profit
• Return on tangible assets: 13%
• Adjusted net profit of ''6m compared to net cash flow of ''15 (''14m after net capital expenditure)
• Net cash up 63% at ''29m
• Per-share dividend up 120%

The Human Screen comments:

MDM is a South African engineering contractor that manages the construction of metallurgical plants and conducts feasibility studies for mining companies across Africa. It listed in 2008 having traded prior to February 2006 as MDM Ferroman. A brief glance at its website reveals about half of current and completed projects involve processing gold, with other metals and coal also represented. It’s 2010 annual report proclaimed, rather more eye-catchingly, "Two-thirds of the earth’s surface is water… The rest we can process".

The feasibility studies lead to future project management contracts.

MDM has been profitable since flotation except last year when the company suffered from the backwash of delayed and cancelled projects following global financial crisis.

The Human Screen would like to go on an African adventure and appreciates the company’s straightforward strategic vision to deliver services on time, within budget, safely and with consideration for the environment. But he thinks adding shares in a company that’s fortunes are so closely tied to commodity prices towards what could well be the end of the commodity super-cycle is a risky notion.

Demand for MDM’s services could fall precipitously, and 2011 turn out to be a portent of something much worse, so the Human Screen is not comfortable using the company’s short earnings record as a benchmark against which to calculate the market valuation.

And at a price of 4.2 times tangible book value there is no obvious value in its assets either.

MDM’s dividend yields 3.4%, but given earnings could be choppy and its policy is to pay out 50% of post-tax earnings, it may not prove a reliable income stock.

More on MDM Enginnering

LON:MDM

HS+ (worth watching for improvement in fundamentals/price)