##{"id":60276,"date":"2012-07-18T12:15:26","date_gmt":"2012-07-18T02:15:26","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/07\/18\/cardno-has-potential-but-is-well-priced\/"},"modified":"2012-07-18T12:15:26","modified_gmt":"2012-07-18T02:15:26","slug":"cardno-has-potential-but-is-well-priced","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/07\/18\/cardno-has-potential-but-is-well-priced\/","title":{"rendered":"Cardno Has Potential, But Is Well Priced"},"content":{"rendered":"

\n\t – Goldman Sachs initiates with Neutral rating on Cardno<\/span>
\n\t – Shift to greater environmental sector exposure a positive
\n\t – Organic earnings growth slowing, acquisitions provide an offset
\n\t – Valuation an issue following recent share price gains<\/strong><\/p>\n

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\n\tBy Chris Shaw<\/p>\n

\n\tCardno<\/span> ((CDD<\/span>)) is a global engineering and environmental consulting group, with exposure to most aspects of non-residential construction spending and a growing presence in the international environmental sector thanks to a series of acquisitions in recent years.<\/p>\n

\n\tGoldman Sachs has initiated coverage on Cardno<\/span> with a Neutral rating, reflecting the view a capitalised<\/span> average growth rate for earnings per share (EPS) of 7% through FY14<\/span> is not enough to justify a more positive rating given strong share price performance of late.<\/p>\n

\n\tThe earnings growth expected should come from a combination of organic growth and growth through acquisitions. Goldman Sachs is forecasting organic growth of around 3% annually, as the stronger growth of previous years reflected stimulus spending and the impact of this is now fading. As an offset, management has demonstrated an appetite for buying growth given $674 million of acquisitions over the past eight years.<\/p>\n

\n\tThis focus on acquisitions should continue and offers some upside risk to earnings in coming years. On the numbers of Goldman Sachs, $100 million in acquisitions should add around 6-7% to group EPS. The broker estimates for FY13<\/span> the balance sheet for Cardno<\/span> could accommodate $60 million in acquisitions based on a long-term gearing target of 40%.<\/p>\n

\n\tThe acquisitions of recent years have allowed Cardno<\/span> to shift to a more defensive earnings profile, as exposure to structural growth in the environmental sector has risen. As noted by Goldman Sachs, sales from environmental operations have risen to 41% of Cardno's<\/span> total sales from less than 10% since FY10<\/span>, while sales from the Americas have also increased from 30% to 55% over the same period.<\/p>\n

\n\tAs well, Goldman Sachs points out more than 70% of Cardno's<\/span> work comes from repeat clients, while the fact the group's largest contract is less than 5% of total sales indicates no reliance on one large customer.<\/p>\n

\n\tIn terms of earnings forecasts, Goldman Sachs anticipates EPS for Cardno<\/span> of 62.5c this year, rising to 65c<\/span> in FY13<\/span>. This compares to consensus forecasts according to the FNArena<\/span> database of 60.7c and 65.5c respectively.<\/p>\n

\n\tThe issue for Goldman Sachs is valuation, as at current levels Cardno<\/span> is trading on an earnings multiple above that of global peers and at an 11% premium to average multiple for the ASX<\/span> Small Industrials index. This is elevated compared to historical levels, as Goldman Sachs notes Cardno's<\/span> five-year average earnings multiple to the Small Industrials is a discount of 16%.<\/p>\n

\n\tWhile the current multiple is partly justified by the fact Cardno<\/span> now offers a more defensive earnings stream, the premium remains excessive in the view of Goldman Sachs. RBS<\/span> Australia agrees, having this week downgraded Cardno<\/span> to Hold from Buy.<\/p>\n

\n\tThe change in rating comes on the back of changes to earnings estimates post two more US acquisitions by Cardno<\/span> and is also a reflection of strong recent share price performance. This has pushed the stock to a level where a Buy rating is no longer justified in the view of RBS<\/span>.<\/p>\n

\n\tNot everyone agrees, as the FNArena<\/span> database shows Cardno<\/span> is rated as Buy twice and Hold twice. Macquarie and UBS have retained Buy ratings post Cardno's<\/span> recent US purchases, both seeing scope for further share price upside despite the gains of recent months.<\/p>\n

\n\tComparing the consensus price target for Cardno<\/span> according to the FNArena<\/span> database of $7.72 to the current share price supports the view valuation upside is somewhat limited at present as the share price is trading around 4.5% above the consensus price target. The consensus target is somewhat distorted though by Credit Suisse's target of $6.07, which has not been updated since January of this year according to information available to FNArena<\/span>.<\/p>\n

\n\tShares in Cardno<\/span> today are down slightly in a weaker market and as at 11.30am the stock was 1c<\/span> lower at $8.09. Over the past year the stock has traded in a range of 44.27 to $8.19.<\/p>\n

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\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"