We awoke on Monday to news that a bid had been made for Intega at 90 cents per share - a 58% premium to its last traded price.
Intega is a longstanding position in clients’ Australian Equities portfolio, one we have held and continued to purchase through its lows of last year (circa 17 cents per share).
The Investment Team often speaks of ‘longer dated’ positions. To us, Intega is a prime example of the value on offer for the patient investor that plays the long game.
We have long seen significant value in both Intega and Cardno (the parent from which it was spun out), which we have detailed in the past (see A Dislocated Duo).
The bid represents a price that incorporates the robust growth and positive industry dynamics that we appreciated in the company.
On some occasions, the market price rises to the value others see, and on other occasions, it takes an outsider in a takeover to “prove up” this value.
This year is likely to continue to be one of heightened merger and acquisition (M&A) activity (see Are we entering deal nirvana?) where longer-term value may be realised (this is certainly what has played out thus far).
Above all, the bid represents the fact that there is value on offer for investors that are willing to be patient and focus on long term value.
The company and the (proposed) transaction
We have previously spoken in detail about Intega. However, what the transaction likely reflects is a recognition of the growth potential of the business.
The four business segments within Intega all offer unique access points to growth.
Our discussions with industry experts, especially in the US highlighted the appeal of each:
Provides construction materials testing, environmental testing, subsurface utility engineering and geotechnical engineering (45% of revenue).
Provides subsurface utility engineering, utility mapping and locating, utility coordination, utility design and surveying. (10% of revenue).
Provides construction materials testing, geotechnical engineering consulting, project management and quality assurance and inspection services. (29% of revenue).
Provides quality, consulting, and engineering services with a focus on the renewable energy and oil and gas sectors. (16% of revenue).
The Biden administration’s infrastructure plan proposes to pull forward much of this needed spending.
Should the company have remained listed, we saw that it was likely that it would have used its balance sheet capacity to acquire additional businesses and generate further growth, taking advantage of these structural drivers.
This would have been one of the considerations of Intega’s board, majority owner Crescent Capital and bidders will have considered in determining the final price. We are pleased that a premium has been proposed that recognises this growth potential.
Both Intega and Cardno had long been undervalued in our eyes.
This was compounded after the Great Virus Crisis of March where they were sold off heavily, despite what we saw as resilient underlying operations.
After the bid, CEO Matt Courtney commented to the Australian Financial Review “the timing of the demerger in 2019 was not ideal for a smaller company. Investors were cautious when the pandemic hit in early 2020, seeking safety in blue chips”.
In the background, both businesses had large operational and structural momentum. A demerged Intega had emerged with a renewed mandate to focus on growth while Cardno had begun a gradual turnaround of its Asia Pacific division under newly appointed CEO Susan Reisbord.
With this in mind, we continued to acquire more shares in both companies (pre-announcement clients owned 4% of Intega).
Source: IRESS, First Samuel
While it is incredible to think that a $200m company like Intega could be trading at the ‘wrong price’ for so long (on average at a 60% discount since September 2019), there are opportunities like this that exist in the Australian market for patient investors.
We see that the significant premium proposed by Kiwa this week reflected these long-term opportunities that the market was not willing to value in the short term.
There are several other opportunities like this across the portfolio, where we see that the market is not yet willing to recognise ‘longer-dated value’ – particularly in positions like Aurelia Metals, Paragon Care and Origin Energy.