Cardno Group - CDD

[Lizard]

Engineering consultants, growing rapidly by acquisition. 2004 IPO ($1/share) to fund growth. 2002 revenue of $20.5m, but pro-forma after latest acquisition (which doubled revenues) gives revenue over $160m for 2005. Dividend payout policy of 70-85% of earnings. Although the sp has risen steadily to $3.16, this still seems reasonable value, as based on pro-forma figures, P/E is 14.8. Even without allowing for any earnings growth, this would put net yield at 5.1-6.3% for the 2006 year.

Charts may indicate another run.

Risks - people based business, and reliant on "name" so relies heavily on good management. Low NTA, so business can grow quickly, but also evaporate quickly. Not overly liquid, as management hold a large portion of the shares and many of them are escrowed.

Discl: Bought last month @ $2.80

[mark100]

I also hold cdd and cddg. I used to work for one of their competitors. There is plenty of work on for engineering consultants at the moment. The main contraints are now proving to be lack of staff and wage pressures. There are just not enough graduates to satsify demand. The company I used to work for was recruiting engineers from South Africa. The main problem is the work is so boring and pays bad so people like me quit and trade shares instead!

cheers
Mark

[Lizard]

Hi Mark. Didn't think I'd find another holder on ST! Nice stock so far.

Would be interested in your comments as to whether or not there are any scale advantages for this type of business, or whether getting too big is more likely to become a hindrance?

[mark100]

Hi Lizard,

I wouldn't say there are any large scale advantages in taking over other small consultancies. There are no head offices etc that can be closed down.

The main benefit is increased diversification. The Eppell Olsen acquisition gives Cardno an expertise in Traffic Engineering/modelling that they didn't have before. Also, as these private businesses are being acquired at EBIT multiples of around 5, they are immediately EPS positive for Cardno.

ABN Amro has this to say last week:

"CARDNO (CDD) BUY

CDD continued its growth via its specialist acquisition strategy. We see no reason why this strategy may not successfully continue as its largest competitor still only has a market share of around 8%. Our FY06 and FY07 NPAT forecasts have increased by approximately 30% following both acquisitions.

Consequently, our DCF valuation has increased to A$3.52 from (A $3.10). We consider our 8% revenue growth forecast for FY06 to be very achievable. With renewed investor confidence, our target price now equates to our A $3.52 DCF valuation. We believe that an FY06 PE multiple of 11x for a relationship based consulting service is particularly cheap relative to peers. Downside risk primarily
surrounds key staff retention. However, CDD’s ever expanding size may
mitigate this risk to some extent. We believe upside risk to earnings far more likely with further acquisitions at around 5x earnings."

Cheers
Mark

[Lizard]

Thanks Mark. Was wondering what was driving the sp over the last couple of weeks - particularly given the result has been well flagged. Have to say, my valuation is a little north of ABN Amro's though....:)

[OldRider]

I don't have any CDD, but I like it and the sector, have held WOR for some time. This company has done well so I have remained with it.

Took an interest in FCO for a while but didn't buy
as well as COF and Lycopodium, if I recall COF might have an offer out for FCO.

To me a profitable sector of the market, with some way to go yet hopefully.

[Lizard]

Result looked good today. Finished another 7% up on the May forecast (which was 40% up on the December forecast, which was 20% up on the previous forecast...). Dividend at 8 cps was 2 cps higher than foreshadowed in earlier statements. s.p. now $3.40, but might just consolidate there for a short while.

[Lizard]

Well so much for the consolidation...just took a quick breath and carried on. $3.65 and humming...

[Lizard]

Okay - try again. Breather at $4.24?

Must be a good share - talking to myself again.[:p]

[davidrob]

Cardno CDD

Go Lizzard !! [:p]

Not personally on Cardno, (CDD) but Agree with you that Cardno (CDD) is a Goodie, IMO.

Massive Increase in Revenue from Last year heh?? -- My quick calcs say 500% PLUS...

And Profit Margin is a very respectable > 10%...

Price Earnings(PE) for Cardno (CDD) is now seemingly approaching a PE of 21; with a Peer Industry Average in the low 12's... but heh, again... what Can I say... this Stock is Better than its peers on the KPI s in my view .....

This Stock has Increased in Share Price north of 144%, in the past 12 months... and the Return on Capital (ROE) went up a whopping 32% from the Previous Year.... to as current ROE of 45% ... Excellent.

Tight Share Register of 36 millions shares... and a very Healthy Dividend Yield of 4.17% from memory.....??....

Yes, it could re --trace a bit, but not too long after, every possibility they will do north of $5.00 perhaps...

Deserve to Lizzard , IMO... anyway !

By the way, what do Cardno actually do for a living ??

Something to do with Engineering Consulting, or was it Engineering Software ???? ,===that has a cure name and even sounds like Microsort XP, but is an Engineering proprietarty model -- was it XP ?? something ??-- or somne such...????.. Or am I way off Beam??

Have to read your posts more in future Lizzard, coz this one went straight UNDER my Radar !!... [}:)][}:)]

Bugger...

All power to you though Lizzard.

This could we be one of those that in a Year or So, is north of $10.00, presumably then, they will do a Stock Split...??

Another Mondalephous(MND) hopefully.... eh what !!

Kind Regards and, Well Researched, Spotted and Done...,

Robbo :)

[Lizard]

Hi Robbo :)

Bang on with your analysis. And yes, they are Engineering Consultants, with XP Software for engineering.

Have run up rather more quickly than I expected. Early days, but looking forward I'm estimating FY 06 NPAT at $11m. So forward P/E of 14 at this price. However, I think the growth potential for this business could be pretty good going forward as high ROE's and relatively small capital required for expansion, so my 12 month target is $5.54. Dividend - at least 20cps at that NPAT, so would give net yield at least 4.7%.

Probably past being a great buying opportunity for now, but might still be worth picking up on weakness.

Cheers,

[Lizard]

Well CDD took that breather at $4.24 - then went back to pick up my earlier call at $3.40 (well spiked down to $3.36 to be precise). Now back at $3.53 and could be ready to start another run.

They announced a large contract win by ACIL this morning, worth $4m, which may see it break the short term downtrend and begin the next run up.

[Lizard]

Ran up to $3.90 on that news so far.

[Lizard]

Profit upgrade for CDD last week and a new high of $4.40 for the sp.

Looking through the numbers on that upgrade in more detail. Equates to profit forecast of $10.4 - $10.9m for Jun 06 year. However, given there's still some months to run, quite likely they are taking a conservative view at this stage and possible we get another upgrade in May/June. I was allowing for $11m, so looks like they're on track. At current price of $4.35, this gives a P/E of 16.5.

Dividend policy is to pay 70-85% of profit. This is a great cashflow business, so I expect we see total 2006 divi of 20cps or net 4.6% yield. My conservative valuation is currently $4.85, but could be some upside.

[Lizard]

Now $4.80, so sitting up close to my earlier valuation of $4.85.

New contract yesterday for management of $88m of work for AusAID to provide education facilities in Indonesia. Has settled down to a more steady performer, but certainly seems worth hanging on to see how the full year result turns out.

[Lizard]

Tested my nerve with the pullback to $4.11, but has come through with the profit upgrade I was expecting in May - forecast $12 - $12.5m. Forward P/E around 15, though comes with some future dilution from convertible notes. If they stick with the dividend policy, should be at least a 11.5cps final dividend (total 20.5cps for the year). My current valuation is $5.25.

[Lizard]

Result just out. Slightly ahead of their forecast range at $12.7m NPAT. Dividend a conservative 10cps. Outlook for continued growth. At current price of $4.50, gives current P/E of 14.3 and net yield of 4.2%.

[davidrob]

Cardno (CDD)

Good Going and great Result for Cardno (CDD) Liz.

Well researched, and a great set of results for you here Liz.Excellent. [^]

(CDD), does Now looks very undervalued, and the foundation, imo, seems v. good for future growth as well.

Good stuff Liz !! And very well picked and probably even, more importantly ..... well Patiently held ...:);)

Kindest Regards,

Robbo :)

[Lizard]

Closer look, suggests pretty much all the growth came from acquisitions, so they may need to keep up the acquisition rate to continue eps growth. Especially as there were a significant number of convertible notes converted post balance date and 7.5m more which could be converted before July 2008.

My calculations suggest a target NPAT of $15-$17m for 2007. Allowing for recently converted notes, gives a forward P/E of around 13.2 (using s.p = $4.50). If the remaining 7.5m are also converted, would bring P/E up to 15.3. (Some reduction in interest cost might help to bring that down).

So although I like CDD, the eps/dps growth could be a little subdued which might keep the share price from racing away. Then again, still looks reasonable value, so in the vicinity of 25% return for the coming year would be my best guess at this point.

(Thanks for the kind words Robbo)

[Lizard]

CDD gathering steam to take on that $5 level. Might be a decent run in it.

[davidrob]

Cardno (CC)

That second last post of yours was v.interesting; and of course a fundantal 'value anlaysis question'-- Liz....:)

.....to paraphrase what you wrote Liz, : "ie: most of the e.p.s. growth (for (CCC) came from.... aquisitions...."...

Of course,sure you might agree Liz, that when companies make 'good acquisitions', us investors want to see synergy;..... Namely where the 'whole' is greater than the 'sum of the parts'....-- or put more simply: where 2 + 2 = at least 5. ...

Then the issues are 'how long' is reasonable for that 'synergy benefit'-- to occur-- and what has the scaleability and Return ON Equity (ROE) ---increase been; now and into the future; to assess whether it was all worth the effort....

Big Topic this one. But a veeery, imo, relevant one.:)

Got me stimmulated... again, Liz !:)

Regards,

Robbo :)

[absolut-advance]

very very very good and important post there ROBBO!

which may require some robbo education ././

synergy,mergers,acquisitions and di-worseification often dont represent value

ie when good management meets a bad business its usually the business which keeps its name.

e.g capral CAA meets GPG the first company i ever owned and CAA is still a dog.
not that i think GPG equates good management but you get the gist.

over to you robbo with your better advancement of explaination.

personally i dont like these acquisition type ...

AA

quote:Originally posted by davidrob

Cardno (CC)

That second last post of yours was v.interesting; and of course a fundantal 'value anlaysis question'-- Liz....:)

.....to paraphrase what you wrote Liz, : "ie: most of the e.p.s. growth (for (CCC) came from.... aquisitions...."...

Of course,sure you might agree Liz, that when companies make 'good acquisitions', us investors want to see synergy;..... Namely where the 'whole' is greater than the 'sum of the parts'....-- or put more simply: where 2 + 2 = at least 5. ...

Then the issues are 'how long' is reasonable for that 'synergy benefit'-- to occur-- and what has the scaleability and Return ON Equity (ROE) ---increase been; now and into the future; to assess whether it was all worth the effort....

Big Topic this one. But a veeery, imo, relevant one.:)

Got me stimmulated... again, Liz !:)

Regards,

Robbo :)

[contrarianinvestor]

quote:Originally posted by mark100

I also hold cdd and cddg. I used to work for one of their competitors. There is plenty of work on for engineering consultants at the moment. The main contraints are now proving to be lack of staff and wage pressures. There are just not enough graduates to satsify demand. The company I used to work for was recruiting engineers from South Africa. The main problem is the work is so boring and pays bad so people like me quit and trade shares instead!

Same here. . . went through the pain of studying a four year engineering degree just to end up making more money trading shares!

[major]

Maybe too, that without the painful benefit of 4 years of further education, you would still be able to trade shares, but maybe not as successfully?

[Lizard]

quote:Originally posted by Lizard

CDD gathering steam to take on that $5 level. Might be a decent run in it.


Closed today at $5.39 today.

Sorry Robbo. Could not understand what you were trying to say there.

[Lizard]

Cardno has been poised at $5.50 for a few weeks - went for the break out today, with okay volume going through at $5.90 before falling back to $5.70.

On fundamentals - I'm uncertain as to potential NPAT for the coming year, so it remains a bit of a risk. Hasn't reached my "sell" price yet though so happy to hold until HY result.

[Lizard]

Broke $6 today. Starting to look expensive here by my calcs, but I'm willing to wait and see what the next result brings.

[Lizard]

Well after fighting the temptation to sell for a little longer, I have exited today on the result.

Half year profit came in at $8.3m, up 16.4% and the indication of less seasonality suggests the full year percentage will be higher. While I like the company and they are producing good growth, I think the market have priced in more growth than they are achieving. In addition, some of the growth is being diluted away by share issues made as part of acquisitions.

I think there are probably better opportunities elsewhere.

[MoSteph]

I've been watching this for a while, but like you... lost interest.

The market's dry for choice at the mo...

[Lizard]

Good full year result for Cardno, with NPAT of $18.47m (including a near $1m tax credit), up 46% on prior year. On a fully diluted eps basis, earnings up 31%. At current s.p. of $7.19, P/E of 19.8. Dividend increased to give full year dividend of 22.5cps, yield of 3.1%.

I no longer hold, but result was slightly ahead of my expectations. Good company, but the growth by acquisition strategy is less appealing in a downturn (if it eventuates). So is having a labour force as the main asset.

[mark100]

Cardno's chart has been slow to move up but its gradually starting to happen.

Gearing is low, business is consulting engineering so not as likely to have large cost blowouts on jobs like the construction plays plus less capex intensive. Earnings multiple is undemanding at around 6-7x consensus for 2009 and 2010.

[macduffy]

Just by the way, Cardno has a branch in NZ, well, Wellington at least where it operates under the name of Cardno TCB. Cardno took over the Johnsonville based business of Truebridge Callander Beach in 2007.

[Dr_Who]

This looks like an interesting little company.

I would like to read more into it. Can you provide and further info? Maybe some research report?

[macduffy]

I've never seen a broker's report on CDD but there is a lot of info on their website including a HongKong roadshow presentation, admittedly a bit old now (July2008) and half year results to 31 Dec 2008.
CDD have grown rapidly by acquisition but still only 77m shares on issue.
Made a SPP issue recently at $2-70, latest price $3-29 so it looks like that has been absorbed satisfactorily.
Historic P/E 7.1, Yield 8.5%.

Looks like they have 5 or 6 NZ offices - a small part of the business.

Disc: Don't hold but interested.

[mark100]

This looks like an interesting little company.

I would like to read more into it. Can you provide and further info? Maybe some research report?

A couple of recent reports attached

[Dr_Who]

Thanks for the info.

I will do some reading this week when I get time.

Will buy some if I like the story. :)

[Lizard]

Just caught up with CDD's report and was sorry not to have got back into them during market weakness. This is one company that has managed to continue the acquisition/expansion model without overly-diluting existing holders.

I'm not sure the easy-growth is there for them from here, but they are in a solid position to take advantage of any competitor weakness. Still, at this price, I'd want to have a better indication of FY10, particularly given the possibility of a weak first half spooking investors.

[Lizard]

Still, at this price, I'd want to have a better indication of FY10, particularly given the possibility of a weak first half spooking investors.

Just released a forecast for that weak first half they'd implied earlier - $14m-$16m NPAT c.f. last year at $18.3m. Seems likely to be just a dip before the next wave of (stimulus money) work hits, so could be a buying opportunity when it finds some support.

[soulman]

Just released a forecast for that weak first half they'd implied earlier - $14m-$16m NPAT c.f. last year at $18.3m. Seems likely to be just a dip before the next wave of (stimulus money) work hits, so could be a buying opportunity when it finds some support.

I'm afraid this is in a confirm down trend Lizard. Although $4 seems like good eating and the likely support.

[Lizard]

Still watching CDD. They're sitting just under that $4 mark.

Solid result out today, though in the current market, I'd like to see them cheaper. Should be some growth to come through from acquisitions in the next year, so would expect them to be reasonably supported. Still hard to be certain re buying into any business that relies on large capital projects at present, though I think CDD are in some okay sectors.

[OldRider]

I have held Cardno for some time, good dividend return, they have had two SPP's & a rights issue in the last four years,
I took part in recent rights issue @ $3.25, applying for 50% more than allocation
and was surprised to get them, so a nice bonus.

For the most part, looking for companies allowing for these top up applications in rights issues
has proved to be a worthwhile earner. Coote - CXG was another.

[Huang Chung]

CDD closed at $6.00 today.

Everything appears to be going swimmingly for CDD. Check out the attached presentation:

http://stocknessmonster.com/news-item?S=CDD&E=ASX&N=226050

There will undoubtedly be a mountain of engineering and environmental consultancy work coming out of the Qld floods. Cardno is Brisbane based, which certainly won't hurt their prospects.



Disc: Holding.

[OldRider]

Still holding, IRR 15.3% over 5 years and 5 additions to original purchase,dividend return probably going to be
over 5% at present price, was over 9% in 09 year.

[Huang Chung]

Yeah, 29c of divvies last year....probably 30-31c this year....ie at or just over 5% FF at the current share price.

[KW]

CDD found itself back on my radar yesterday, and as of Feb it seems it went on a lot of people's radars (judging by sudden and sustained increase in volume). Reasonably expensive (in terms of the "new normal" valuations these days) but reasonable div yield of 4.2%. It would certainly appear that environmental consulting is a field that is just going to grow. So back on board this one.

[mark100]

I would be wary of engineering consultants at the moment. GHD has been laying off staff and discounting their rates Aust wide. CDD might try and cover for this with more acquisitions but I just can't see any organic growth in the Australian market at the moment. FY13 could be a bit tougher.

[KW]

I dont think they are focused on the Australian market - they have 270 offices in 85 countries and 55% of their revenue comes from the Americas (only 38% from Australia). Organic growth is low (7.5%) but they are acquiring companies instead, mainly in the US. Its certainly a much larger and more international company than when I last owned it a few years back.

[mark100]

Yes I know they are global, their revenue split is probably similar to GHD (total revenue also similar to GHD). But Aust is still a large part of their revenue and if things are slow here I can't see things being much better overseas. Just a note of caution for a stock that doesn't appear 'cheap' at the moment

[mark100]

And so it comes to pass...down 19% on an ordinary forecast. And things have not picked up for engineering consultants. It is still getting worse. Lots of employees with not much to do, so they are charging more time do the few jobs they have which means margins on each job get squeezed

[soulman]

And so it comes to pass...down 19% on an ordinary forecast. And things have not picked up for engineering consultants. It is still getting worse. Lots of employees with not much to do, so they are charging more time do the few jobs they have which means margins on each job get squeezed

Interestingly Mark, MND is going great guns, although they are not a consulting business. Maybe a brand name like Monadelphous is key in winning and retaining project.

[mark100]

soulman, consultants do a lot of design and pre-construction reports / studies etc. So in my view they can be a leading indicator of construction activity

[Huang Chung]

Grabbed some CDD at $5.31 late last week, for much the same reason I picked up ALQ a few days earlier.

My theisis is that CDD (like ALQ) is being treated by the market as a mining services stock, and whilst that is partly true, they are quite well diversified, with the largest part of their business now in the United States!

Call it a case of throwing the baby out with the bath water if you want.

[KW]

HC - If you like CDD and ALQ you might be interested in EAL.

[Huang Chung]

I'll have a look KW.

ALQ having a very strong day today, and CDD is also doing a little better.

[Huang Chung]

Strange day for a breakout given the negative lead from the US, but that seems to be what's happening to CDD today.

[macduffy]

May be coincidence but Simon Bond of RBS Morgans is recommending it as a Buy, according to "The Bull" today:

"The relatively smaller profit impact from a rapidly deteriorating Australian mining sector highlights CDD’s diversity. It appears to have been caught up in the indiscriminate “mining service” sell-off. A potential value opportunity exists. CDD remains positively leveraged to improving US economic conditions and a more positive post Australian election environment."

[Huang Chung]

Couldn't have said it better myself, lol....