The second of these is Coffey International Limited (COF).
COF is an engineering consultancy company with a history
going back to 1959. It listed on the ASX in 1990. The company went on a
diworsefication spree from 2003 to 2008, acquiring more than 30 businesses from
a combination of cashflow, capital raisings and debt, until the GFC stopped
this stupidity. Faced with heavy losses from write-offs, coupled with heavy
staff turnover, management changed hands in March 2011. Since then, current
management has restructured the business by selling and discontinuing non
profitable businesses, cutting down debt, and improving operational
efficiencies.
In a nutshell, the core businesses of COF are quite
stable. This arises from its entrenched
relationships, embedded expertise and geographical reach, aided by a very
fragmented customer base. Not unlike the story of GEICO, management is engaging
in cancer surgery, stripping away the useless parts and retaining the good
businesses at its core. Management’s
efforts are starting to gain traction- costs are coming down, margins are being
maintained or improved, staff turnover is reduced.
Due to disappointing results in the last few years, and an
anticipated slowdown in mining investments, I believe that the market is now overdiscounting
near term uncertainties for COF, and overlooking the underlying trend
improvements in COF’s businesses.
Valuation
COF has 256 m shares on issue. At AUD$0.32 cents, market cap is AUD$82m. Operating cashflow is AUD$21m per annum,
giving P/Cashflow multiple of 4. If I
add $66m of net debt, the enterprise value/ cashflow multiple is 7. Given COF’s
long operating history and stability of its revenues, a reasonable valuation is
about 10 times multiple. Hence current
market price is a 30% discount, assuming no costs improvements and no revenue
or margin growth. Recent update by
management on 4 December 2012 appears to indicate that revenues are holding
whilst costs are still being removed, although the outlook for the second half
is still uncertain.
Earnings
Trailing PE is 11 based on NPAT of $7m derived by adding
back $37m worth of write-offs. At this
stage, due to write-offs and restructuring, earnings multiple is not a reliable
indicator of the value for COF. In the
long run, we expect the earnings to match the cashflow, which will bring
earnings multiple into the low single digit figures.
Balance Sheet
As at June 2012, COF has net debt of $66m. There are $9m in franking credits.
Disclosure: The author owns shares in COF.
Disclaimer: the content of this post is not to be relied on as financial advice. It contains my personal opinion only, plus facts that I cannot verify to be accurate. Do your own research and seek financial advice where appropriate. I have made many mistakes in the past, and will continue to do so in the future.
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