bad press will trigger sell-off, page-6

Mike, thanks for your posting on COF's exposure to Development Aid markets. However, I think you're underestimating the granularity of Coffey's customer base. Looking at the segmental reporting in the accounts shows that the earnings pressure for the company over the past 12 months has come from its Consulting and Project Management divisions, while the International Development Business has roared ahead. This is attributable to several long-term projects awarded during 2008 and 2009 (US$140m, 3-year aid contract in Iraq, Sudan and Peru for Millenium Change Group, $100m, 5-year road rehabilitaiton project in the Phillipines for Ausaid, US$40m Tatweer civil service re-build and re-train project in Iraq, US$66m, 2-year legal reform project in Mexico awarded to MSI, which Coffey acquired just few months prior.) I take your point on potential negative sentiment from the public scrutiny of aid agencies; however my sense having spent time with management as a fund manager before retiring is that Coffey has always prided itself on conducting highly referenceable work for well-credentialised clients. I also think that Development Aid is what western governments will continue to do, notwithstanding fiscal constraints, as the cost of losing sympathetic international allies is beyond political tolerance. So I think their development revenues are reasonably well underwritten for the next tow or so years. I think the biggest threat to continued share price strength is a delay in securing new minerals and infrastructure work, which remains the mainstay of Coffey's revenue base. I don't believe COF to be a must-own company, but it is a highly cash-generative business, which at less than 4.5x EV/EBITDA, looks to me to be undervalued, something I struggle to say for the rest of the small cap end of the Australian equity market, which trades closer to 7.5x EV/EBITDA on average. I score COF a 6.5 out of 10 investment at current price levels.