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

Stable Balance Sheet and Decent Increase in Net Operating Cash Inflow: 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 30 October 2020, the market capitalization of the company stood at ~$124.52 million. 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.

The company has demerged from its quality, testing, and measurement business to create a new firm- Intega Group Limited, with effect from 31 October 2019. During the transition, the CDD shareholders received 1 Intega share for every 1 Cardno share held on the record date. However, the company is providing ongoing assistance to Intega Group Limited for certain support functions, including Information Technology, Financial Processing, and Human Resources.

At the end of 30 June 2020, the company reported a healthy balance with a net debt position of $0.6 million as compared to net debt of $93.6 million on 30 June 2019. 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. The company also reported a lower working capital ratio of 1.3x as compared to 1.5x in the previous year. In the same time span, net operating cash inflow stood at $43.5 million as compared to the inflow of $40.8 million in FY19. This was mainly due to the decent operating result for the year, improved working capital management and increased efficiency in the conversion of direct labor costs to debtors.

FY20 Balance Sheet Strength (Source: Company Reports)

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. In the same time span, it reported a NPAT of $56.6 million for the year ended 30 June 2020. 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)

Key Margins: On the profitability side, the company reported a gross margin of 50.6% in FY20, higher than the industry median of 33%. However, it reported a fall in its net margin from previous year. In the same time span, the company witnessed a YoY increase in EBITDA margin to 6.5%, up from 4.1% in FY19, indicating increased profitability. Looking into the balance sheet, assets/equity ratio of the company was 2.31x, slightly lower than the industry median of 2.38x. During the year, debt/equity ratio of the company was 0.61x, higher than the industry median of 0.39x. In the same time span, the company reported a cash cycle of 94.4 days, higher than the industry median of 2.7x. During the year, the company reported a current ratio of 1.27x, reflecting a slight increase than the industry median of 1.25x.

Key Margins (Source: Refinitiv, Thomson Reuters)

During FY20, the Asia pacific marked continued financial underperformance but remains in decent operational shape with an improved run rate over the prior year. The segment was restructured in the latter half of the year, creating a healthy platform for further growth.

ID EBITDA and % Margin (Source: Company Reports)

Completion 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. The company has acquired a total of 2,292,700 shares under the Buy Back facility.

Key Risks: The main risks arising from Cardno’s financial instruments are financial risks, including 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 working on transitioning from global offices to a global company and is likely to witness considerable prospects for further growth. It is aiming for lower cost to serve and is focusing on maintaining momentum and growing its Infrastructure business. Some businesses of the company stand a decent chance of securing the higher market and wallet share. The company anticipates EBITDA to be in the range of $40 million to $45 million in FY21. The company may witness mild impacts from the outbreak of the COVID-19 pandemic. However, the greater presence of the company in the toxicology field may increase its margins with effective business controls. The company also remains focused on re-establishing brand eminence through enhanced client focus.

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: Despite a challenging year because of the devastating Australian bushfires, demerger from ITG, impact from the global pandemic, and the transition of CEO, the company faced all the challenges with resilience and emerged stronger. The stock of CDD gave a return of 13.72% in the past six 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 ~$0.239 and a resistance level of ~$0.341. We have valued the stock using the EV/EBITDA multiple based relative valuation approach and have arrived at a target price, offering an upside of lower double-digit (in % terms). Considering the stable balance sheet, decent rise in net operating cash inflow and revenue, modest long term outlook, current trading levels, and keys risks stated above, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.290, up by 3.571% on 30 October 2020.

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

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