Thursday 30 April 2015 by William Arnold Company updates

Coffey International 3Q15: Restructuring and impairments

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Coffey reported further writedowns and restructure costs, in part due to the decline in iron ore prices

The continued decline in iron ore prices and the collapse in oil markets have impacted Coffey’s clients and therefore, the business. As such Coffey has reported further writedowns and restructure costs as follows:
  • Restructure costs in the range of $6-8m for FY2015 (annualised future benefit of restructure of $7-$9m). This is a cash cost and related to redundancies in the Geoservices division
  • Non-cash goodwill impairment of $12m relating to the Geoservices division
  • Earnings guidance for FY2015: underlying EBITDA before restructuring costs and impairment in the range of $18-20m with net loss after tax in the range of $16-18m

Key credit considerations

Relative value:
  As credit metrics have materially deteriorated, a repricing of the Coffey Notes further below par would seem likely.

Key risk:  Debt refinance: The turnaround story has not yet eventuated. There is expected to be less EBITDA than forecast, more costs than expected have been recorded and the level of debt to repay remains the same – while the term to maturity shortens.

Outlook: Positively, the company has exited the volatile mining/oil/gas sector (except for a small amount of oil sector remediation work) and will focus on the stable International Development and growing Infrastructure sectors. Under the scenario where the remaining business is stable, and taking into consideration the cost savings, annual EBITDA would be in the $27m region.

Relatively small company: with associated limited financial flexibility (market cap ~$38m).

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 ~70% 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 MSI (bought in 2008 for around AUD$30m), and potentially other aid businesses which are profitable.

Detailed restructure/financial analysis

Figure 1 details the half yearly performance and forecast 2H15 figures based on Coffey’s guidance. The last few halves have been benign with no exceptionally negative news however the company has now indicated it will post significant restructuring in the back end of this financial year.

Coffey results table including EBITDA and NPAT
Source: FIIG Securities, Coffey International

When the Coffey Notes were issued in September 2014, the company expected to be at the bottom of a business cycle.  In prior years, losses were driven by collapsing mining activity and the company expected to replace this business, to some extent, in the oil and gas sector.  However this sector has also come under extreme pressure too with the fall in the price of oil and Coffey is again restructuring and writing down the value of its business in these sectors.  Figure 2 shows the breakdown in revenue by sector for YTD FY15.

Chart of third quarter 2015 total revenue by sector


Source: FIIG Securities, Coffey International

The restructuring relates to Coffey’s mining operations in Western Australia, and oil/gas internationally (Brazil/Canada). The business has now completely exited these operations and recognised redundancy or restructure costs and written off the value of these businesses (goodwill). Going forward Coffey will no longer derive any revenue form mining (0% down from 6% in Figure 2), and oil/gas related exposure will only be to profitable east coast Australian & NZ operations (c6% down from the 9% in Figure 2) related to site remediation services (environmental) not exploration. Figure 3 details Geoservices underlying EBITDA with 1H15 broken down by International and ANZ.

Figure 3. Graph of Geoservices underlying EBITDA

Source: FIIG Securities, Coffey International

Figure 4 details the company’s actual results to FY14, the Bloomberg consensus expectations of FY15 on issue on the bond (generally in-line with Coffey’s expectations), and Coffey’s revised guidance for the FY15.

Figure 4. Table of Coffey's actual financial results to FY14

Source: FIIG Securities, Bloomberg, Coffey International

Outlook: The company has exited mining/energy (except for a small amount of oil sector remediation work) and will focus on international development and infrastructure.  Post restructure, under the scenario where the remaining business is stable, and taking into consideration the cost savings, EBITDA would be estimated in the $27m region.

Summary

The company’s results are significantly lower than their prior expectations. Profitability FY15 will deteriorate with underlying EBITDA at $19m (versus former expectations of $29m) and NPAT at a $17m loss compared to expectations of $12m profit. The turnaround is taking longer or is worse than expected and credit metrics have therefore deteriorated. We expect the bond price will likely fall further below par. Positively, the company no longer has any material exposure to the volatile oil/gas/mining sectors. The company’s full FY15 financial reports are due out 10 August 2015 which will provide much more comprehensive information.

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