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Cardno posts ‘pleasing’ FY19 results and proposes demerger

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Celebrating 75 years in operation, the Australian infrastructure and environmental services company has released financial results outlining increased revenue and profits in the twelve months ending 30 June 2019. It is considering demerging parts of the business in a move towards a pure-play offering.

Gross revenue stood at A$1,319m (US$888m) up 18% on the prior year, whilst fee revenue jumped 17% to A$895m. EBITDA from continuing operations rose by 10.3% to A$62m (US$42m), at the top end of guidance, and achieving expectations for a third year in a row. Backlog also grew strongly by 14.7% year-on-year.

However, the firm also posted a full-year net loss of A$44.5m (US$30m), up from $14m in the previous year, including a further write-off of goodwill in the domestic Asia Pacific business associated with acquisitions made prior to 2015.

Net debt stood at A$93.6m (US$63m), up from A$19.9m on the FY18 position, following four acquisitions, notably those of Raba Kistner and TGM in late calendar year 2018. 

At an operating level, the firm reports under five segments, managed separately by location and the services provided: Americas (33% of gross FY19 revenues); Asia Pacific (19%); International Development (ID) (27%), Construction Sciences (17%) and Portfolio Companies (PPI and LatAm) (5%).

Whilst most divisions saw improvement year-on-year, Brisbane-headquartered Cardno’s Asia Pacific segment - including its home market - continues to struggle.

Chairman Michael Alscher said the "pleasing group result" masked a continued financial underperformance in the Asia Pacific consulting division, where revenues dropped 4% due to a lack of any material project wins during FY19 despite being part of some "very strong bidding syndicates". However, he expressed his confidence that it was only a matter of time before the Australian business "bounces back". 

The firm had previously highlighted a strategy to focus on "larger tenders", which it warned could effect a drag on earnings (EA 14-Sep-17).

In contrast, the Americas division continues to see positive momentum, marking a 14% rise in revenue during the period. And despite political uncertainty in the northern hemisphere, including the impact of Brexit on its European operations, the ID division marked a 13% rise in revenues.

The Construction Sciences segment saw revenue doubled thanks to organic growth in Cardno’s domestic market and the acquisition of 470-strong Raba Kistner, a Texas-based firm offering civil engineering consulting services (EA 09-Jan-19). Meanwhile, in its portfolio segment, Cardno PPI (its oil and gas quality assurance business) saw its strongest year both in terms of financial performance and work in hand for a number of years.

In his first annual report as CEO and managing director, Ian Ball stated: "I am delighted to report that Cardno has advanced significantly and is now a stronger business with an improved outlook and backlog. Our focus is on Client Excellence, People Excellence and Delivery Excellence across all parts of our business, enabling sustainable and profitable growth underpinned by our company values of Safety, Integrity, People and Excellence."

He added: "During my first year, the leadership team has initiated specific actions to improve our focus on clients, enhance our acquisition and retention of talent and improve our efficiency and agility. We are also leveraging the deployment of digital technology to drive ‘innovation that matters’".

Going forward, Ball outlined the firm’s focus on building Cardno into a "a client-focused professional services business generating sustainable growth and double-digit margins, leveraging digital technology".

As such key initiatives include: continued focus on Americas by prioritising and accelerating growth of priority service lines (where Ball also underlined the firm’s aspiration to "complete an acquisition of scale"); continued focus in Asia Pacific on winning several large opportunities in the pipeline; continued focus on "people excellence" including the expansion of its inclusion and diversity programmes; and the further advancement of its digital transformation.

Demerger

The firm has also announced the proposed demerger of Cardno into two separate Australian Stock Exchange-listed companies with the splitting out of its quality, testing and measurement businesses from the rest, subject to shareholder approval.

If approved, it will be implemented via a capital reduction and scheme of arrangement and completed by early November. The two entities will be known as Cardno Limited, comprising the existing global consulting services and international development business (namely Asia Pacific Consulting, Americas Consulting and International Development) and Intega Group Limited, comprising the materials testing, underground surveying and O&G quality assurance business (namely Australian Construction Sciences inc NZ, US Raba Kistner, US PPI Oil & Gas, US Survey businesses providing subsurface utility engineering services (UES)).

Cardno Consulting would represent around 4,500 staff across 124 offices, whilst Intega would hold around 2,000 staff located in 101 offices; pro forma FY19 gross revenues would be A$956m and A$428m respectively. 

Cardno Consulting services would comprise environmental consulting (including environmental assessment, permitting, restoration, remediation and environmental management in both Asia Pacific and the Americas), infrastructure consulting and international development. Ian Ball is to remain MD/CEO with Peter Barker as CFO.

The firm indicated that it believes the proposed demerger is "the best way forward to maximise value for all shareholders" It added: "As we have discussed in prior communications, the Cardno of old was a mixture of businesses focussed on the creation of scale and little was achieved in the way of integration between some of these acquisitions."

Chairman Alscher went on to explain that "while the two businesses remain as one business, neither business is able to build a truly focussed approach to its operations, staff and culture". By splitting the business, the remaining Cardno business will become a "pure engineering and environmental consulting and international development company".

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