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, namely Asia Pacific Engineering and Environmental, Americas Engineering and Environmental, International Development and other non-reporting segments. The Asia Pacific region provides services in civil and environmental science and Americas region delivers expertise to private and public sector clients across the environmental sector. The ID business designs and implements large-scale sustainable solutions for both development assistance agencies and private clients.

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 28 August 2020, the market capitalization of the company stood at ~$134.11 million. FY20 was a challenging year for the firm. Despite the demerger, CEO transition, devastating Australian bushfires, and the global pandemic, the company emerged stronger. During FY20, the company reported an increase of $41.4 million in revenue and a growth of 11.1% in the underlying EBITDAI (EBIT plus underlying adjustments, depreciation, amortisation and impairment losses) to $73.5 million. CDD deals with B2B (business to business) or B2G (business to government) and has been able to deliver its services and solutions despite the COVID-19 pandemic. The company has reported a net profit after tax of $56.6 million for the year ended 30 June 2020.

It has refinanced its bank debt facilities because of the demerger, and the new facility is a three-year multi-currency cash advance and letter of credit syndicated facility, expiring in October 2022. The company is in a net debt position of $0.6 million at the end of 30 June 2020. During the year, the company recorded a net operating cash inflow of $43.5 million as compared to the inflow $40.8 million in FY19. This is primarily driven by a decent operating result for the year and improved working capital management, and through increased efficiency in the conversion of direct labor costs to debtors.

The company witnessed a mild impact of COVID-19 and hence saw a degree of productivity loss. However, the company does not have a material exposure to developers and landlords, which are most immediately impacted by COVID economics.

The majority of the company’s divisions met or exceeded the 2H20 forecast, with the company benefitting from existing work in hand and projects. While the future impact of COVID-19 on the company is not clear, it remains conservative in its performance approach for FY21. The company is focusing on evaluating and mitigating the impacts of the COVID-19 lockdowns or restrictions. It is also focused on consulting and professional services company delivering infrastructure, environmental, and social projects in the Americas, Asia-Pacific and various emerging nations.

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)

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 is able to 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 is liquid enough to 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. CDD provides ongoing assistance to Intega Group Limited for certain support functions, including Information Technology, Financial Processing, Human Resources under a transition services arrangement.

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. Asia Pacific Consulting EBITDA margins declined to 0.5% with slower than expected business and project disciplines. The division was restructured in the second half, creating a solid platform for growth. Fee revenue for the America’s division went up 23% on the pcp, and EBITDA margin increased from 10.4% to 13.9%. During the year, EBITDA margin for ID went down to 1.4%, driven by under-performance from its European businesses.

Asia Pacific Financial Highlights (Source: Company Reports)

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 the transition from a company with global offices to a global company. It anticipates mild impacts from COVID-19 pandemic. Some of the company’s businesses may grow revenues due to COVID-19, while others will be negatively impacted. This outlook is consistent with more aggressive than industry predictions, reflecting the greater presence of the company in the toxicology field. The Americas segment will focus on maintaining momentum, growing the Infrastructure business, and looking to build a wastewater division. The Asia Pacific business is focused on business controls with activities focused on margin lift.

The company is expecting a significant opportunity for further simplification and lower cost to serve. The company might face the impacts of the global pandemic, but some businesses may stand to gain the market share and share of wallet. While forward looking projections are particularly challenging in the current environment, the company anticipates FY21 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 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 5.26% in the past three months and is trading close to its 52-weeks’ low level of $0.195, proffering a decent opportunity for accumulation. We have valued the stock using the EV/EBITDA multiple based relative valuation approach and have arrived at a target price of lower double-digit upside (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 $0.30 on 28 August 2020.

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

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