Enjoyed reading through your posts and you are 100% right, if management sits back and does nothing (not including hiring more staff to take advantage of the Gas & Oil boom in Northern Australia) then the outcomes will be as you have laid out.
Believe this is far too conservative and may lead to a loss of opportunity in investing in this company. COF increased staff last full year in its Geoscience Unit and will require more up until 2015 in the Oil & Gas sector particularly. This will be a growth area for COF now they have stabilised and future profits will be poured into this business to offset decline in mining revenues.
Further issues in US where they are delaying International Projects may occur in the next couple of months, but things are looking a lot brighter up until May of this year.
To determine specific future revenue growth based on historical growth, the break down of revenues in the Geoscience business unit based on previous presentations from Coffey are as follows: Geoscience Revenue for full year 2012 $265.00M (following % breakdown from AR 2012, year ending June 2012): Oil & Gas $39.75M Mining $84.80M Infrastructure $98.05M Commercial Property $29.15M Other $10.6M Government $2.65M
Organic Revenue Growth from business operations: Point 1 - If Oil & Gas revenue grows in line with the market, 26% minimum, then we are looking at $47.7 Million this year. That is an $8 Million increase in revenue for oil & gas. This would increase revenue to $272.95 Million.
Point 2 - Mining will stay steady for the next couple of years unless market starts growing significantly again. Any growth in mining will come from precious metals as mentioned in the Open Briefing session. Precious metals revenue has grown from under 10% to 30% of mining revenue. There is potential for growth despite the overall market being down, but should not be factored in until this can be demonstrated by company.
Point 3 - Infrastructure is about to turn around, Infrastructure investment has taken off significantly in NSW where they are catching up with the rest of the country after years of underinvestment. Victoria and Queensland are likely to increase infrastructure investment in 2014 as they come into election years.
Point 4 - Commercial Property is stable, but not in a downtrend anymore.
Geoscience revenue is about to get back to 2008 levels of revenue, for the full year after dropping as low as $238.5M in 2010. 2008 incorporated discontinued operations so it is implied there is significant organic growth in existing operations, particularly during bad times. This is gold to all you Buffettoligists out there.
Confirmation in the Open Briefing that the $1.9 Million in restructuring costs are not anticipated to re-occur. There is potential dependent upon whether the mining market decreases over the next six months; however at this stage it is unlikely. Open Briefing again mentioned the last quarter of 2012 was the hardest environment they had seen for some time, however the pressures had relaxed since the Iron Ore pricing had increased.
The big thing for me is the strategic objective of increasing margins. For the Full Year margins were 9%, on $265 Million in Geoscience Division. They are aiming to move to 15% over the next two years. It is highly probable they will achieve this. They will achieve this goal primarily by reducing staff turnover (it is always more profitable to use experienced staff, projects and work will be completed with greater certainty, therefore easier to set accurate margins).
In the December Half presentation, John Douglas advised Coffey had specific programs in place to achieve this goal (not through further job cutting). With the changes management have completed over the last two years in restructuring this business, it is highly probable they will achieve this objective too.
15% margin on $265 Million is $39.75 Million for the half year, an additional $10 Million in EBITDA (2012 – $29.5 Million). Applying it after growth in the Oil & Gas industry, EBITDA would become $40.94 Million. If this is applied to all of Coffey’s business units (may take a further two years to be successfully applied in these units), the following contributions will be made: International Development – 15% margin on $111.4 Million is $16.71 Million Project Management – 15% margin on $36.8 Million is $5.52 Million
This would make EBITDA $63.17 Million ($40.94 Million + $16.71 Million + $5.52 Million). Would need to adjust based upon whether you believe this is achievable or not. With the moving on of the General Manager in charge of the Project Management division, there is a probability this can be achieved.
Overall the two managers at the top of this organisation are making changes and are at the beginning of a journey to change this company for the better. Looks of the initial phases of Leighton Holdings for me are appearing. Urs Meyerhans strong background in implementing new systems into organisations is a positive for this organisation, given the recent history of dodgy accounting causing problems with financial reporting. It will also provide confidence they have implemented management accountability correctly too.
Valuation of the company at current EBITDA multiple of 4.5 times would put the company value at $284.265 Million or $1.11 per share given 255,839,165 shares on issue. This should be the minimum valuation for the next two years. If EBITDA is similar to CDD, then you would be looking at around 8 times, the market capitalisation would be $505.36 Million. This would make the share price $1.975.
Best of Luck Lost
COF Price at posting:
44.0¢ Sentiment: LT Buy Disclosure: Held
