Ann: Transfield Services preferred tenderer for DIBP contract, page-29

"What I was asking was if anyone could identify ANY business that meets the high standards against which you critique TSE then please let me know what business it is because I would like to invest in it."

Sure, I'll let you know of not just one business that meets my high standards (truth be told, I didn't make those standards up myself; I merely copied and borrowed them from other far smarter people than me who had long track records at being successful investors), but I'll offer up several from which you can choose (although not all of them might be cheap enough to buy at present):


AMC
APA
ARB (*)
AUB (*)
ASX
AZJ
BRG (*)
CGF
COH
CSL
CTX
DLX
DMP
DTL (*)
FLT
IFL
JHX
NHF (*)
ONT (*)
PPT
REA
REH (*)
RHC
RKN (*)
RMD
SDI (*)
SHL
SYD
TAH
TCL
WES
WFD

(*) denotes small cap


"TSE doesn't make the same amount of high margin profit from a broad cross-section of industry but which business does? Especially one which divides itself in terms of both industry and geography?"

Why is a necessary condition for you that businesses you buy should operate across "a broad cross-section of industry"?

If a business has a great competitive and leading position, with wide economic moat in just one secular-growing industry because of the unique or differentiated products or services that company offers within that single industry, with the attendant pricing power and sustain-ably superior Returns on Capital, why on earth should that company diversify into other industries that would dilute the current Returns on Capital earned by the business?

By way of just one example, specialist plumbing supplies distribution company, Reece (REH) because of its business model that places it miles ahead of the field, has been outperforming its competitors for decades. The last thing the Reece board would ever contemplate is getting into different industries, such as construction or fuel distribution or concrete manufacturing or logistics? Why would they?

There's a colloquial term for the result of companies who want to get involved in a wide array of businesses: "Di-worse-ification."


"If one offs are excluded then EBITDA is positive (albeit in some cases very small) in all divisions."

The trouble with EBITDA as a measure of profitability is that it is not a very good one, I'm afraid, for the simple reason that it fails to account for a charge on the capital that is required to fund a company's activities (in accountant-speak: "Depreciation")

And in capital-intensive businesses like engineering contractors, the capital requirements are high, meaning the Depreciation charge is large.

And as owners of a business, the financial returns that one receives from the business only becomes realise-able once the capital charge has been deducted.

Which is why EBIT is really the meaningful measurement of underlying profitability, and Retrun on Assets (ROA), and not EBITDA

Put another way, EBITDA measures earnings after deducting cash costs only, while EBIT is a measure of earnings after deducting both cash and non-cash costs.

Because, make no mistake, the business has to be able to fund both of these types of costs before it can be said to be profitable in the eyes of shareholders.

And in TSE's case, positive profitability on this purer EBIT measure is made only from government work, as detailed in an earlier post.

And, while you cheer the notion of such lucrative (and it is egregiously lucrative) government work, were I a shareholder I would be on tenterhooks at the prospect that some new Foreign Affairs Minister - possibly representing a government of a different political hue - might, at a whim, change the entire gig completely, or just sufficiently enough that it would end up restoring the ROA TSE generates from this activity to more normalised (but still attractive) levels of, say, 30%, instead of the mouth-watering level well in excess of 100%.

In either of these scenarios, TSE's earnings would undergo the proverbial crunch.

As a believer in reversion to the mean, precedent teaches me that all Excess Returns will undergo fade, either because new entrants appear on the scene and compete away the those excess returns, or the counterparty (ies) at whose expense those excess returns are being garnered, make an active decision to cease accepting to be gouged any longer.

I know that if I was an even remotely financially literate and ambitious civil servant wanting to make a name for myself in the service of our nation's Current Affairs ministry, I would be drafting all sorts of correspondence to my colleagues and superiors about a certain situation that I have identified can save the Commonwealth may tens of millions of dollars.


But hey, as you say, the company might be taken over before then. Who knows?