Australia | Jun 20 2007
By Greg Peel
Engineering consultant Cardno (CDD) has just made its foray into the US market with the US$28m purchase of Portland-based WRG Design. Credit Suisse understands Cardno has been studying the engineering services market in the US for nigh on a decade or more, so one assumes this was not an impetuous decision. According to the ASX announcement:
“WRG offers physical infrastructure services in land use planning, civil engineering, water resources, sustainable development, survey and landscape architecture. Its head office is located in Portland, Oregon and the firm has a further five offices in the growth oriented states of Nevada, Arizona, California, Idaho and North Carolina.”
According to UBS, WRG is “effectively a copy of Cardno without the traffic management business”.
Analysts calculate the acquisition multiple to equate to 5-6x EBIT. Earnings accretion calculations range from 7-11% as Cardno picks up WRG’s US$45m in sales which represent double digit margins and growth. On the back of the announcement, UBS has increased its target price from $6.40 to $6.80, ABN Amro from $7.12 to $7.49, and Credit Suisse from $6.80 to $7.75. Only these three brokers cover the stock in the FNArena database.
CS sees the acquisition “of great significance for the company”. The engineering services industry is similarly structured in the US as it is in Australia. The difference is that a small firm over there employees 200 people compared to 20 locally. The analysts believe this could be the first of many US acquisitions for Cardno given it has been “stalking” the market for such a long period. They make reference to a similar Canadian firm – Stantec – which has tripled its earnings in the past five years through “roll-up” acquisitions.
ABN has increased its discounted cashflow valuation for Cardno from $6.47 to $7.13. However, the analysts’ target price increase is not as material as they have reduced their target price premium from 10% to 5% “reflecting the need for acquisitions to increase in size in order to be meaningful to future earnings”.
UBS also suspects Cardno’s US presence will increase, possibly double in size over the next year or so, through further acquisitions. UBS has maintained its Neutral rating however, while both CS and ABN hold Outperform/Buy ratings. The current average target price stands at $7.35 as the stock trades higher today – up 1.7% to $6.65 at last glance.