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
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
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
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
Source: FIIG Securities Limited, Company presentation
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%
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)
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