as buffet opines....

..."Invest in businesses that are simple enough that they can be run by poor managers, because at some stage they probably will be."

COF bears full witness to this edict.

COF is not the finest business in the world, but it is a strong surplus capital generator, with limited calls on capital, and with a granular customer base and economic sector exposure, all providing access to good, annuity revenue streams.

The problem with COF over the past 5 years has not been with the business itself; the business has actually performed well. The problem has been with prior management's misappropriation of the company's excess cash flow.

Specifically, between 2005 and 2010 the then Board and Management of Coffey presided over almost $160m in acquisition forays (for context, COF over that period of time generated about half that, i.e., $85m...the balance of the acquisition spree funding was provided by gearing the business to unsustainable levels, effectively taking what is a low-risk, meat-and-potatoes business and turning it into a highly leveraged, highly risky proposition).

It is only now that the unwinding of this debt millstone is being completed, by a new management team. This latest COF result presents to me the first real evidence of new MD, John Douglas and CFO, Urs Meyerhans, stamping their imprimatur on the company.

Specifically, the most significant feature of this result is the much-improved shape of the balance sheet. With Net Debt down to $66m compared to $78m six months ago, this puts Net Debt-to-EBITDA at 1.8x, it's lowest level since 2005.

By my reckoning, even without any further working capital liberation, Net Debt-to-EBITDA will be around 1.3x this time next year and EBITDA-interest coverage will be over 8x. This compares to average interest coverage of the past 6 years of around 4.2x, which provides some context for the financial health trends for the company compared to its cavalier past.

Which brings us neatly back to the all-important subject of Management.

Businesses tend to evolve in cycles. COF is starting to look just like it looked 6 or so years ago: a fundamentally good mix of businesses supported by a healthy balance sheet.

There is the risk that management presumes, once again, to have a mandate to globalise/internationalism the company, with all the attendant risks and value destruction potential.

However, in COF's case this is unlikely to happen again, I believe, the reason being that the current management team has seen the near-death experience of the business first hand, and has spent all of its time at Coffey busy with the long slog of resurrecting the company from the ashes.

Instead, my reading of the way the current management team sees its shareholder value mandate is to get the company into pristine shape, with a view to selling it.

Put another way, if COF in 12 months' time is still trading at 7x P/E and 4x EV/EBITDA, and on a FCF YIELD of 12%, with the balance sheet becoming under-geared, then it will almost certainly be taken over.

If anyone wants to get inside management's heads, then spending the hour listening to the webcast of the latest result on the Coffey website is quite instructive, I believe.

Every time I have occasion to interact with the new Managment team at Coffey, I am left with the distinct impression that they are not going to do anything dumb; indeed that they are, wittingly or unwittingly, window-dressing the company for sale.

Whenever I invest the first question I try to answer is what the scope is for permanent destruction of my capital. In COF's case I think it is minimal.

It's a 6 out of 10 business being valued like a 3 out of 10 business, in my mind.

Prudent Investing

Cam