Cardno Limited

Company Overview: Cardno Limited (ASX: CDD) is an infrastructure, environmental and social development company, which is focused on improving the lives of people and communities around the world. The company implemented the demerger of its Quality, Testing and Measurement businesses into a separate ASX listed entity named Intega Group Limited. CDD has three reportable segments managed separately by location and services provided, -Asia Pacific Engineering and Environmental, Americas Engineering and Environmental, International Development and other non-reporting segments.

CDD Details

Decent Increase in Revenue and Stable Balance Sheet: Cardno Limited (ASX: CDD) is an infrastructure, environmental and social development company, which is focused on improving the lives of people and communities around the world. As on 25 September 2020, the market capitalization of the company stood at ~$127.4 million. 2020 was a challenging year for the company because of the devastating Australian bushfires, demerger from ITG, impact from the global pandemic, and the transition of CEO. However, the company faced all the challenges with resilience and emerged stronger. During FY20, the company reported an increase of $41.4 million in gross revenue to $978.3 million and a growth of 11.1% in the underlying EBITDAI to $73.5 million. Despite the COVID-19 pandemic, the company has been able to deliver its services and solutions with B2B (business to business) or B2G (business to government). The company has reported a net profit after tax of $56.6 million for the year ended 30 June 2020. As a result of the demerger with ITG, it has refinanced its bank debt facilities with a three-year multi-currency cash advance and letter of credit syndicated facility, expiring in October 2022.

At the end of 30 June 2020, the company reported a net debt position of $0.6 million as compared to net debt of $82.1 million on 30 June 2019. In the same time span, the decent operating result for the year, improved working capital management and increased efficiency in the conversion of direct labor costs to debtors resulted in a net operating cash inflow of $43.5 million as compared to the inflow $40.8 million in FY19.

With a transition to work from home scenarios and the impacts from the COVID-19 pandemic, the company witnessed a slight loss in its productivity. However, the company did not have material exposure to developers and landlords, and most of its divisions met the 2H20 forecast and benefitted from existing work in hand. While the impacts of COVID-19 on the company’s performance are not certain, CDD remains cautious in its performance approach for FY21 and is focusing on mitigating the impacts of the pandemic.

FY20 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Cardno Limited. Crescent Capital Partners Ltd is the largest shareholder in the company, with the percentage holding of 48.76%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Decent Cost Management and Improved Profitability: During FY20, gross margin of the company stood at 50.6%, higher than the industry median of 33%. This shows that the company is well managing its costs and can convert its revenue into profits. In the same time span, the company saw an improvement in EBITDA margin to 6.5%, up from 4.1% in FY19, indicating increased profitability. During the year, current ratio of the company stood at 1.27x, slightly higher than the industry median of 1.25x. This shows that the company retains a decent liquidity position and can pay off its current liabilities using its current assets. In the same time span, assets/equity ratio of the company was 2.31x, slightly lower than the industry median of 2.38x. This indicates that the business is financed with a more significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. During the year, debt/equity ratio of the company was 0.61x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Demerger of Intega Group Limited: The company’s quality, testing and measurement businesses were demerged from Cardno Limited with effect from 31 October 2019, creating Intega Group Limited. Under the agreement, the shareholders of CDD received 1 Intega share for every 1 Cardno share held on the record date. Under a transition services arrangement, CDD continues to provide ongoing assistance to Intega Group Limited for certain support functions, including Information Technology, Financial Processing, and Human Resources.

FY20 Segment Performance: The company has three reportable segments managed separately by location and services provided, namely the Asia Pacific, Americas, International Development, and other non-reporting segments. During FY20, EBITDA margins of the Asia Pacific Consulting went down from 5.2% in FY19 to 0.5% with slower than expected business and project disciplines. However, the segment was restructured in the latter half of the year, creating a strong platform for further growth. In the same time span, America’s division saw an increase of 23% in its fee revenue, and EBITDA margin went up from 10.4% to 13.9%. America’s segment saw a higher backlog, mainly with the Government Services business. During FY20, the underperformance from the ID European businesses resulted in a fall in EBITDA margin to 1.4%.  

Asia Pacific EBITDA and %Margin (Source: Company Reports)

Buy-Back of Unmarketable Parcels of Shares: The company announced an off-market share buy-back of all the shares for all the shareholders who held unmarketable parcels of shares. The unmarketable parcel of shares refers to shareholding in CDD with a consideration of less than $500.

Key Risks: The main risks arising from CDD’s financial instruments are interest rate risk, foreign exchange risk, credit risk and liquidity risk. The company is also exposed to the risks related to competition, industry downturns, inability to enforce contractual and other arrangements, legislative and regulatory changes, sovereign and political risks, ability to meet funding requirements, dependence on key personnel and other market and economic factors.

Outlook for FY21: The company is likely to complete its evolution from a company with global offices to a global company. With the outset of the COVID-19, the company may witness mild impacts. However, some of the company’s businesses may grow revenues due to COVID-19. The greater presence of the company in the toxicology field is resulting in a more aggressive outlook relative to the industry predictions. In the coming years, the Americas segment will focus on maintaining momentum, growth in Infrastructure business, and is also looking to build a wastewater divisio. The Asia Pacific business is focused on lifting its margins with effective business controls.

The company is expecting considerable prospects for further simplification and lower cost to serve. Some businesses of the company stand a decent chance of securing the higher market and wallet share. The company has provided guidance for FY21 and anticipates EBITDA to be in the range of $40 million to $45 million.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is working on simplifying and unifying processes, procedures, means and methods to reduce administrative demands and total costs. It is prioritizing non-billable time away from administrative tasks to client engagement, project delivery, and technical advancement and is focusing on driving integrated global working through the financial and operational fundamentals. As per ASX, the stock of CDD gave a return of 29.55% in the past three months and is trading close to its 52-weeks’ low level of $0.195, proffering a decent opportunity for accumulation. On a technical front, the stock of CDD has a support level of ~$0.209 and a resistance level of ~$0.399. We have valued the stock using the EV/EBITDA multiple based relative valuation approach and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, resilient financial position despite the global uncertainty and modest long-term outlook, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.285 on 25 September 2020.

CDD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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