Investment Matters

Firstly to the Coffey takeover offer

Firstly, to the Coffey takeover offer

Coffey International is an engineering services company, specialising in geoservices, international development and project management.  It provides services in the transport and property infrastructure, energy and resources sectors, as well as for international aid projects.  It is listed on the ASX.  This week it received a takeover offer from a large US listed engineering services company Tetra Tech, at a 130% premium to the company's share price just prior to the announcement (42.5cps vs last trading at 18.5cps).  The Board has recommended shareholders accept the offer.

Coffey's operations and earnings have been under pressure, because of difficult trading conditions.  However, there remains a sound business underneath, and management has taken steps to right size the business (including shutting down some oil and gas operations).  The share price, however, had fallen considerably more than the status of the business warranted. 

The takeover reflects an EV/EBITDA (Enterprise Value/ Earnings Before Interest Taxes Depreciation and Amortisation) valuation of 9.3x (using historical underlying EBITDA and net debt at 30-Jun-15).  Note: EV/EBITDA is the commonly used metric to value businesses such as Coffey. This is a reasonable price, but doesn't include allowance for a future earnings turnaround.


Share price normalisation

In the context of your investments, this is a reminder that normalisation will occur: eventually the underlying value of a business will be reflected in its share price.  Where meaningful disparity persists i.e. the market fails to reflect fair value for an extended period, such as the situation with Coffey, eventually a takeover offer will be made.

First Samuel clients have experienced this in the past.  Examples include Calliden and Oakton.  There are investments you currently own the shares prices of which have not normalised.  We don't know the specific time frame in which this will occur, but we have confidence it will.