Barnett said Monadelphous would struggle to replicate its 2015 profits in 2016 because of the lower oil price, but he continues to recommend Atlas as a speculative buy despite the flooded iron ore market, Atlas’ relatively high costs, debt and its $1.4 billion loss.

Atlas, he says, offers exposure to any rise in the iron ore process.

Unlike Atlas, Monadelphous reported a profit of $105.8 million, in line with expectations, but work slowed in the second half of the year, and Barnett said weak cash flow reconciliation was a recurrent theme for the engineering and construction group, with customers pushing for longer payment terms.

Payment windows have blown out from 36 days in June 2014 to 73 days in June 2015.

“The switch from construction to maintenance contracts is also likely to be negative for working capital given the less likelihood for prepayments,” Barnett wrote in a client note.

“The company expects cash flow reconciliation to improve in coming halves, but we have low confidence given recent history. That said, even with slow cash flow conversion the balance sheet should continue to build strength and the company should be able to maintain a high payout ratio.”

While Monadelphous has not provided any guidance for 2015-16, listening to the conference call yesterday Barnett said it was reasonable to assume revenue would be no better than the annualised income for the second half of the year, $1.6 billion.

“Margins remain under pressure, with the company only expecting performance to be better than peers,” he wrote, adding that he believed earnings would decline into 2017.

“Based on our assumption of gradually declining margins, Monadelphous appears fair value on an earnings multiple basis, however, the cash flow conversion continues to be weak, which worries us about the quality of the EBITDA margins.

“We see significant margin decline as a possibility, which is not captured in our estimates. We have retained our reduce recommendation.”