Monday 09 February 2015 by William Arnold Company updates

Coffey International - 1H15 trading update

THIS CONTENT IS SUITABLE FOR WHOLESALE INVESTORS ONLY

Key points

  • Modest profit of $1m 1H15 on slightly lower revenue of $296m. Coffey is a turnaround story, same as it was when originated five months ago. The are some “green shoots” but enough time has not yet passed to confirm the strength or otherwise of the turnaround (noting the company is now profitable unlike losses in FY11, 12 & 13)
  • Key risk: Can Coffey turn around and improve the Geoservices business to a level sufficient to paydown debt and/or support refinance when due (noting the International Development business has always been stable and viable)
  • Relative value: With one of the highest AUD issue trading margins, investors are being paid to take risk, however we do not expect material improvement in the credit profile in the medium term
  • Equity raising/asset sales: Access to equity markets may be limited as last time Coffey went to the market in 2011, the underwriter was left with approximately70% of the $22m retail offer (while the institutional offer was fully raised: $18m). If needed however, Coffey could sell its separate US based international development business Management Systems International (MSI) that was purchased in 2008 for around AUD$30m, and potentially other aid businesses which are profitable

Details

  • Modest profit of $1m for 1H15 on slightly lower revenue of $296m. Positively, forward indicators suggest improvements may be seen in the business 12 months plus
  • Costs for the half included $1.3m in one off refinancing break costs, and redundancy costs associated with the reduction of 70 staff in Geoservices. $4.4m was also spent in capex relating to office consolidation which is now complete

Coffey details table

Source: FIIG Securities Limited, Company presentation

The company notes the significant client market volatility since November 2014 including:

  • Infrastructure delays in VIC and QLD – NSW remains very prospective
  • Oil price lower
  • Iron ore price down, copper price down sharply, gold price stabilising
  • AUD down – very helpful for profits if not the balance sheet
  • Property market remains strong
  • Some pressure on the foreign aid budget in Australia
  • Bipartisan support for 0.7% gross national index (GNI) target in UK

Continued restructure away from volatile sectors:

  • 77% of underlying EBITDA 1H15 is now comprised of stable and reliable businesses (International Development 65% and Project Management 12%)
  • Mining now only comprises 4.8% of total 1H15 revenues, and 8.2% oil/gas (which is actually very stable)
  • Total Geoservices (the more volatile business) revenue actually grew for the first time in 2 years, but margins are down

Coffey underlying EBITDA

Source: FIIG Securities Limited, Company presentation

Geoservices

  • Positively, fee revenue rose to $101.6m for the half with modest growth in Australia, but was 8.0% lower than 1H14
  • Modest growth in the transport, infrastructure and property industries was achieved, while oil and gas remained strong. Mining continued to decline as clients focus on OpEx as opposed new CapEx

geoservices fee revenue by industry

Source: FIIG Securities Limited, Company presentation

  • The business responded to market conditions by reducing staff numbers late in the half, impacting margins
  • As a result, reported EBITDA of $2.9m was down 42% on 1H14 at $5.0m
  • In relation to margins, the company says the industry looks to have found a base

geoservices margins

Source: FIIG Securities Limited, Company presentation

geoservices 12 month contracted fee revenue

Source: FIIG Securities Limited, Company presentation

  • Forward contracted revenue has been impacted somewhat by political uncertainty and the change to two state governments (which generally causes a pause to government driven projects). The company believes they will see growth from 2016

International Development

  • Revenue of $152.8m was down 9.2% on 1H14 with EBITDA of $8.4m (down on 1H14 results of $9.8m)
  • Half of the reduction was due to discontinued business with the rest attributed to the completion of major projects
  • Margins remained stable at 5-6%

international development total revenue

Source: FIIG Securities Limited, Company presentation

  • Positively, total contracted revenue, including contracted forward revenue beyond 12 months, was up 14% compared to December 2013 and the value of contracts short listed or in negotiation, significantly increased also compared to the prior period. So while there appears some weakness in this business in the short term, the longer term (a year plus) looks more healthy
  • While the Australian aid budget has experienced some pressures during the half, the UK has maintained bipartisan support for its aid funding target of 0.7% of gross national income

Project management

  • Project Management continued to improve profitability, reporting EBITDA of $1.5m. Revenue was up at $13.2m (compared with $12.4m in 2H14) and margins improved to be 11% (compared with 4% in 2H14)
  • 12 month contracted revenues continued to improve to $16m (previously $15m in 2H14 and $13m in 1H14)

debt profile

Source: FIIG Securities Limited, Company presentation

  • Gearing (net debt/(net debt and equity) was 30% 1H15 (compared with 26% in both 2H14 and 1H14)
  • Each 1c decrease/increase in the AUD against the USD increases/decreases debt by $0.34m. This caused total debt to increase by $4.7m from Jun to Dec in 2014
  • Cash holdings were stable at $30m for 1H15
  • Coffey extended its banking facility from February 2016 to September 2017
  • The company reiterated that reducing debt and increasing financial stability remain key priorities
  • The company continues not to pay a dividend

Disclaimer 

The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced, distributed or to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

The information has been prepared solely for informational purposes only and does not constitute or form part of any offer for sale or subscription of, or solicitations or any offer to buy or subscribe for, or any invitation to subscribe for or purchase any securities and nothing contained herein shall form the basis of any contract or commitment whatsoever. The information is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. No action has been taken to permit the public distribution of the information in any jurisdiction and the information should not be distributed to any person or entity in any jurisdiction where such distribution would be contrary to applicable law.

The information has not been lodged with Australian Securities and Investments Commission or any other authority. The information is intended for distribution only to financial institutions and professional investors whose ordinary business includes the buying or selling of securities in circumstances where disclosure is not required under Chapter 6D.2 or Chapter 7 of the Corporations Act 2001 of Australia (the “Corporations Act”) and only in such other circumstances as may be permitted by applicable law. Any securities that may be offered by the Issuer in, or into, Australia are offered only as an offer that would not require disclosure to investors under Part 6D.2 or 7.9 of the Corporations Act. This information is directed only to persons to whom disclosure is not required under Part 6D.2 or 7.9 of the Corporations Act. The information is a summary only and does not purport to be complete. It does not amount to an express or implied recommendation or a statement of opinion (or a report or either of those things) with respect to any investment in the Issuer nor does it constitute a financial product or financial advice. The information does not take into account the investment objectives, financial situation or needs of any particular investor. FIIG does not provide accounting, tax or legal advice. Prospective investors are required to make their own independent investigation and appraisal of the business and financial condition of the Issuer and the nature of any securities that may be issued by the Issuer. By accepting receipt of the information the recipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investment expertise to understand the risks involved in any purchase or sale of any financial securities discussed herein.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the Issuer which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice. No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

Any offering of any security or other financial instrument that may be related to the subject matter of this communication will be made pursuant to separate and distinct documentation (“Offering Documents”) and in such case the information will be superseded in its entirety by any such Offering Documents in its final form. In addition, because the information is a summary only, it may not contain all material terms and the information in and of itself should not form the basis for any investment decision. Any decision to purchase securities in the context of a proposed offering of securities, if any, should be made solely on the basis of information contained in the Offering Documents published in relation to such an offering.

Neither FIIG nor the Issuer shall have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG or the Issuer be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG has been engaged by the Issuer to arrange the issue and sale of the Notes by the company and will receive fees from the issuer of the Notes. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. FIIG’s AFS Licence does not authorise it to give personal advice. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that all of the views expressed in this document accurately reflects their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG.