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Stocks
Fund manager stock pick for the long haul: VDM Group
Jill Fraser - October 1, 2007
Fund manager stock pick: VDM Group
Current share price: $2.77
Projection: $3.30 in 12 months’ time
Fund manager: Andrew Mouchacca, Contango Asset Management
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Andrew Mouchacca, Contango Asset Management | In this new section, CompareShares picks fund managers' brains for the stocks to watch in the year ahead. Jill Fraser reports
With its tentacles set to spread into the resource sector while retaining a firm hold on the civil engineering market courtesy of Western Australia’s infrastructure construction cycle, Perth-based engineering and construction company, VDM Group is this week’s stock pick for the long haul from portfolio manager Andrew Mouchacca at Contango Asset Management.
Mouchacca projects that VDM Group, currently priced at $2.77 a share, could hit $3.30 in 12 months’ time. “There are numerous opportunities for the company to grow via acquisition. Its growth expectations over the next few years is 20-plus percent [per annum],” he says. Mouchacca also thinks that the stock is currently well valued. “It’s sitting on an 11 times PE,” he says.
Micro cap VDM Group listed on the Australia bourse on 15 February 2006. When Contango Asset Management started buying the stock for its listed investment company, Contango Microcaps Ltd (CTN) its share price was hovering around 70 cents. It has clearly been a smart buy for the LIC, with the stock up almost four times since purchase.
“Besides the organic opportunities through the markets it's currently exposed to…there are opportunities for the group to extend from the west to the east coast and become a major player over there,” continues Mouchacca.
With limited broker coverage in the micro cap space Contango has to do a lot of the groundwork. “Given the size of the companies within our portfolio, part of our due diligence for stocks is to visit these companies on numerous occasions throughout a year,” says Mouchacca. “We have to understand the business model, growth opportunities, the competitive landscape and whether management is competent. We need to feel comfortable that management is capable of growing the business beyond where it currently is because accessing capital in this market isn’t a problem.”
VDM Group was created from engineering and construction business Van Der Meer Consulting. The company expanded from an engineering consultancy to include a construction business to bring projects from "concept to completion".
In an aggressive series of steps for the firm, VDM Group has completed eleven acquisitions since listing as part of an ongoing acquisition strategy to facilitate expansion of existing and new services. The group now comprises seven consulting engineering businesses, six construction businesses and a contracting business.
Substantial shareholders are Holding Redmont Resources Pty Ltd, at 5.2 per cent, and Westpac Banking Corporation, at 5.0 per cent.
In a recent report by Merrill Lynch it was noted that profit of $10.4m for FY07A was broadly in line with previous company guidance “although we suspect slightly below what the company would have liked to have achieved due to weaker performance from its construction division” but that 2008 bodes well with the group’s recent acquisitions in May this year of Western Australian construction company Wylie and Skene, exposing it to the resource construction market.
Merrill Lynch believes that 2008 will be a year of consolidation for VDM with a significantly enhanced revenue base and a focus on improving the operating performance of its existing businesses.
Current forecasts by Merrill Lynch indicate that the acquisitions have created a company capable of generating more than $400m in revenue and over $26m in profit in FY08. Returns on Invested Capital are predicted to increase from 12.4% in 2007 to 17.9% in 2009.
“Government and resource companies are undertaking massive amounts of construction but labour and machinery is constrained so it’s a very tight market and utilization is high,” says Mouchacca.
“Those that can manage their cost side i.e. labour, effectively from a service perspective are the ones that will be able to grow their margins and given that the environment is very strong, they’re the ones that are going to benefit from a profit perspective.”
Mouchacca cites key risks for the VDM Group as labour costs and contract pricing i.e. “the potential to misprice construction work”.
VDM Group of businesses
Consulting Division
* Van Der Meer Consulting (WA, VIC, NSW, Vietnam)
* VDM International (U.A.E.)
* Burchill VDM (QLD)
* Barlow Gregg VDM (QLD)
* Ewing VDM (WA)
* Belleng VDM (QLD, WA)
* Ecoz VDM (NT)
* PRISM Design+Management (WA, NT)
* APECGLOBAL (VIC)
Construction Division
* Civmec Construction & Engineering (WA, QLD)
* Keytown Constructions (WA, NT)
* Wylie & Skene (WA)
* VDM Ultrabuild (WA)
* Hyparspace Building Solutions (WA)
* Complete Steel Projects (WA)
* Quikloc Building Systems (WA)
Resources & Infrastructure Division
* Malavoca (WA)
* Cape Crushing & Earthmoving (WA)
* Como Engineers (WA)
Source: VDM Group
More articles from this week's CompareShares newsletter:
Stocks: Fund manager stock pick for the long haul: VDM Group
CS stock lab: Guide to analysing stocks - part 2
Superannuation: Does your super fund stack up?
CFDs: MF Global buys BrokerOne
Leverage: Comparing margin loans and instalment warrants
Stock of the week: Sirtex Medical stands out
Warrants: The commodities trader's no.1 resource
Smart investing: Neglect can lead to money regrets
Analyst report: LPTs still hot property?
Commodities: Miners not taking advantage of the gold bull
Whatever your views, you can discuss this article - or any of Jill's articles - on our message board Your 2 Cents.
Jill Fraser has 25 years' experience in the media as a radio producer on 2UE and journalist for News Ltd, Australian Consolidated Press and Key Media.
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