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 MARKET REPORTS |
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Analyst report - shares
"Stock of the week": Cardno Ltd
November 12, 2007
Tim Morris, wise-owl.com analyst
Stock: Cardno Ltd
Recommendation: BUY
Code: CDD
At first glance it is easy to throw Cardno Ltd (CDD) into the same basket as other companies in the engineering services sector. However, Cardno offers one striking point of difference that bolsters its investment credentials, that is, a mix of exposure to the growth and ethical sides of the investment spectrum, similar to the characteristics offered by TFS Corporation (TFC), which we profiled two weeks ago.
The company’s origins date back to 1945, when ‘Cardno & Davies’ commenced operations as a small engineering practice in Queensland. Cardno’s evolution gained pace during the last decade, when it began pursuing acquisition opportunities before making the transformation into a public enterprise. After listing on the ASX in 2004 at $1, Cardno’s string of acquisitions now totals 25, which combined with organic growth has delivered solid shareholder returns in excess of 630%, with the stock currently sitting well over $7.
In its modern form, Cardno offers a diverse range of professional services in social and physical infrastructure development. The company’s physical infrastructure services cover a broad but obvious range of markets such as building and property, transport, water, and urban development, most of which are experiencing strong demand around the globe.
The ethical side of this investment stems from Cardno’s social infrastructure services portfolio, in which it partners with private clients, sovereign governments and communities, to create appropriate and sustainable solutions to local issues such as health, education, and resource management.
Aid organisations focussed on improving conditions in developing nations sometimes lack the skills and expertise to address particular social problems, which is where Cardno fills the gap. For many tasks it is more economical for the aid groups to use their funds to employ companies such as Cardno to address the social issues at hand and implement a solution. Cardno has previously worked on social infrastructure projects aimed at reducing the spread of AIDS in South East Asia, as well as one designed to implement and promote sustainable water and irrigation infrastructure in Afghanistan.
Contracts from aid agencies are a significant contributor to Cardno’s bottom line, with 32% of 2006-07 revenues falling in the ‘official development assistance’ category. Cardno recently expanded its global presence in this growing development assistance market through its acquisition of global social infrastructure consultancy, Emerging Markets Group (EMG).
The purchase is set to generate strong synergies across Cardno’s existing social infrastructure businesses, Cardno Agrisystems and Cardno Acil, as well as provide access to the world’s largest funding agency, USAID. Given that the purchase was only made in May, its full impact on Cardno’s overall bottom line has yet to be felt. However, as EMG generates $50m in revenues, the future contribution should be significant considering Cardno’s overall revenue base was $265m in the most recent financial year.
Overall, 8 acquisitions were made in the last financial year. All were EPS positive, with EMG being the most significant. These new businesses officially added $53.1 million to 2007FY revenues. However on a full year basis they generated $145m, which is indicative of the growth to look forward to in the year ahead.
Since entering the 2008 financial year, one additional acquisition has been announced; WA based ‘Buckland Engineers’. Although the business is set to be a small part in the greater scheme of things, generating only $6m in revenues, it was regarded as ‘an attractive partner’ for Cardno to consolidate its representation in Western Australia and provide greater access to the booming resources sector.
The sector seems under represented in Cardno’s project portfolio when you consider that only 1% of revenues came from mining and resources in the last financial year. Cardno’s financial performance has been impressive despite this fact; therefore there remains exciting potential if it were to increase its foothold in this seemingly untapped growth market.
Since listing, Cardno has developed a strong track record of financial performance, which was most recently bolstered by a 45.8% rise in net profit to 18.47m in the last financial year. This result capped off 4 straight years of strong revenue, profit, and earnings per share growth.
Cardno’s has notched up an impressive financial track record since listing. Source: Cardno.
With the stock trading on a forward PE of 17.7, it is priced at a discount to the rest of the engineering services sector, which is why we feel that its growth potential is yet to be fully ‘priced in’. Cardno’s Managing Director of 10 years, Andrew Buckley, has successfully navigated the company along a strong growth path since listing, and we are confident that this trend will continue as he strives to deliver on Cardno’s vision of being ‘a world leader in the provision of professional services for the improvement of physical and social infrastructure’.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
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Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
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