On March 17, 2014, AE Portfolio Conservative Holding Cardno Ltd (ASX: CDD, OTC: COLDF) announced largest acquisition in its history, the purchase of Houston, Texas-based PPI Group for USD145 million.

The infrastructure and environmental services consultant also completed a AUD50 million equity placement of 8.2 million shares at AUD6.10 per, which was oversubscribed by existing and new Australian and international institutional investors, to help fund the deal. Remaining net proceeds will be used for potential future acquisitions.

Cardno operates across multiple sectors in North America and Australia. Its strategy is to pursue organic and acquisition-driven growth to build out engineering and consulting capabilities across multiple geographies. It’s well diversified by sector and geography, with more than 50 percent of sales now generated in the US.

Cardno is well placed to benefit from a broad-based US recovery, and it should also benefit from a weaker Australian dollar, though a weaker aussie may also impact its purchasing power as it seeks to acquire businesses in international markets.

That hasn’t happened yet, however, as management continues to make big deals.

PPI provides specialized engineering services to the oil and gas sector in the US, West Africa and Asia-Pacific. The company generated annual revenue of USD133 million and earnings before interest, taxation, depreciation and amortization (EBITDA) of USD21.5 million in the year ended Dec. 31, 2013.

Cardno expects the PPI deal, including the impact of the equity raising, to be immediately earnings accretive, contributing approximately AUD0.02 per share in fiscal 2014 and an expected full-year contribution of around AUD0.05 in fiscal 2015.

Cardno CEO Michael Renshaw said the acquisition of PPI is in line with the firm’s strategy of expansion in attractive growth markets such as energy. It’s another foothold in the expanding oil and gas sector in the US and key emerging markets.

In addition to the primary markets of the US and Nigeria, PPI is active in Australia, Singapore, South Korea, Japan, Malaysia and Angola.

PPI’s engineering services to the midstream and upstream oil and gas sector will complement Cardno’s existing environmental and permitting capabilities in this market. PPI provides Cardno with new capabilities and proprietary systems in asset and quality management that are also applicable to other asset-intensive industries.

Major clients include five of the world’s Super Oils, BHP Billiton Ltd (ASX: BHP, NYSE: BHP), Cobalt International Energy Inc (NYSE: CIE) and Noble Energy Inc (NYSE: NBL).

As has been the case with several other of Cardno’s recent acquisitions, complementary and overlapping client bases offer potential for cross-selling across the US, Latin America, Africa and Asia-Pacific.

Oil, gas and other energy clients will now account for around 25 percent of Cardno’s annual sales, and management sees solid opportunities for organic growth going forward.

Management reported fiscal 2014 first-half revenue growth of 5.5 percent to AUD633 million, as fee revenue grew by 4.4 percent to AUD466.2 million and earnings before interest, taxation, depreciation and amortization (EBITDA) was up 3.8 percent to AUD74.5 million.

Statutory net profit after tax (NPAT) was up 7.4 percent to AUD43.1 million, though one-off contributions lifted the result by approximately AUD4 million.

Operating cash flow was AUD33.8 million, while the balance sheet remains strong, with a net debt-to-equity ratio of 25.1 percent and cash of AUD94.7 million as of Dec. 31, 2013.

Basic earnings per share (EPS) were AUD0.2982, up 3.3 percent versus the prior corresponding period. Cardno declared an interim dividend of AUD0.19 per share, up 5.6 percent from AUD0.18 a year ago. The payout ratio for the period was 63.7 percent.

Profit for the period reflected merger-and-acquisition driven growth, with performance in the underlying business tempered by a significant slowdown in Gulf of Mexico oil spill work and in the mining sector and included one-off accounting adjustments associated with past acquisitions, partially offset by redundancy and merger-and-acquisition costs.

Cardno’s balance sheet is in good shape, with gearing less than 25 percent and ample interest coverage. Debt facilities have been upsized and extended, with average maturity of five years. Cardno has multiple currency facilities totaling approximately USD400 million, approximately USD245 million drawn and about USD140 million of headroom and AUD100 million in cash.  Most debt is denominated in US dollars, providing a natural hedge.

Australia & New Zealand sales were down 3 percent versus the prior corresponding period due to weaker market conditions in the mining sector.

Organic revenue declined by 13 percent, largely due to the completion of major projects in Western Australia coupled with generally weaker market conditions in the mining and resources sectors in Western Australia and Queensland. Margins in the region were softer, and conditions remain competitive and challenging.

Americas revenue was up versus the first half of fiscal 2013 by 8 percent, mainly due to favorable exchange rates. Organic revenue declined 12.3 percent due to the accelerated
slowdown in the Gulf of Mexico oil spill work, US coal sector constraints and the impact of the US federal budget uncertainties.

These factors were offset by contributions from acquisitions. Margins declined by about 1 percentage point due to the reduction in higher-margin Gulf of Mexico oil spill work, redundancy costs associated with business alignment and general business mix.
Emerging Markets posted a solid half-year, with sales up approximately 20 percent. Organic, currency-normalized fee revenue growth was 18 percent versus the prior corresponding period, though margins contracted due to softer results in Europe.

Management noted that the project pipeline remains healthy across key markets and sectors, and recently awarded projects are in ramp-up mode.

Management did note evidence of improved economic conditions in key markets, particularly the urban and infrastructure sectors. Recent confirmation of the US federal budget should drive activity in the defense sector, though overall improvement will be somewhat tempered by unusually harsh winter weather in the northern states, particularly affecting field technicians and site work.

The Australia-New Zealand region remains challenging, although business confidence appears to be improving gradually. Improving conditions in the key markets of New South Wales and Queensland around urban development and infrastructure are partially offset by the slowdown in mining and resource related activity.

Emerging Markets continues to be a key enabler of cross-selling, opening new markets and geographies for Cardno’s various businesses.

Work-in-hand of approximately AUD720 million as of Dec. 31, 2013, will underpin performance over the remainder of fiscal 2014 and into fiscal 2015, while the lower value of the Australian dollar will improve the Australian dollar value of profits from Cardno’s international operations.

During the six months ended Dec. 31, 2013, Cardno completed the acquisition of Cardno Haynes Whaley, establishing a high-profile presence in structural engineering in Texas. Management noted that Cardno Haynes has posted strong results since being acquired.

Mr. Renshaw noted improving conditions in the residential sector and firming commitments to infrastructure projects in some states in Australia and in the US. At the same time, the outlook for the resources sector is mixed globally, with the oil and gas market for Cardno’s services growing steadily, offset by weaker conditions in mining.

Mr. Renshaw reiterated fiscal 2014 full-year guidance issued along with half-year results, noting that “most of Cardno’s markets remain challenging” and that a harsh winter in the US “will have a short-term impact.” Nevertheless, Cardno is “well placed” to take advantage of opportunities as broader economic growth takes hold in its core markets.

Cardno’s share price was hit hard in mid-November 2012 and again in mid-2013 as the impact of twin slowdowns in the global mining and energy industries led to downward revisions for earnings guidance and a short pause is dividend growth.

But a strong balance sheet and continuing cash-flow generation position to company as a consolidator in the global infrastructure and engineering services space.

The share price has recovered well from a 12-month closing low of AUD4.88 on the Australian Securities Exchange (ASX) on June 13, 2013, trading at AUD6.94 as of April 8, 2014. At these levels the stock still yields a healthy 5.3 percent.

Cardno is a buy under USD8.05 on the ASX using the symbol CDD and on the US over-the-counter (OTC) market using the symbol COLDF.

Cardno’s fiscal year runs from Jul. 1 to Jun. 30. The company reports full financial and operating results twice a year; it typically posts first-half results in mid-February, with full fiscal year numbers out in mid-August.

Interim dividends are usually declared in February along with first-half results. Final dividends are usually declared in August along with full fiscal-year results.

The most recent interim dividend of AUD0.19 per share was declared Feb. 18, 2014, and was paid Apr. 7, 2014, to shareholders of record as of Mar. 21, 2014. Shares traded “ex-dividend” on this declaration as of Mar. 17, 2014.

Cardno declared a final dividend in respect of fiscal 2013 of AUD0.18 on Aug. 20, 2013, when it announced full-year results. This dividend was paid Oct. 11, 2013, to shareholders of record on Sept. 13, 2013.

Among the analysts who cover the stock six rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology, while five rate it a “hold.” None of the brokerages covering Cardno recommend selling it.

The average 12-month target price among the seven analysts that provide a figure is AUD7.23, with a high of AUD8.05 and a low of AUD5.95. Based on Cardno’s April 8 closing price on the ASX of AUD6.94 the implied one-year total return, including the present annualized dividend rate of AUD0.37 per share, is 9.5 percent.

Dividends paid by Cardno are “qualified” for US tax purposes. Based on the “fiscal cliff” compromise reached in Washington, DC, in early January 2013 dividends will be taxed at Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.