Annual General Meetings (AGMs) generally aren’t much fun. But they can provide valuable insights for those who attend. The best AGM that I attended in 2016 was that of Cardno (CDD), an engineering consultancy whose share price had fallen almost 90% since 2014.
Gerry Cardno and Harold Davies started the business in Brisbane in 1945. The company thrived during the post-war boom years through to the 1970s, designing bridges, sewage systems, dams and roads throughout Queensland.
After listing on the ASX in 2004, Cardno expanded across Australia and internationally. A buoyant mining sector and 44 acquisitions saw revenue rise from $94m to $1.3bn over the period to 2014. By then it was valued at nearly $1.2bn, up from $35m when it floated.
Then commodity prices slumped. Mining-related investment evaporated and there weren’t enough infrastructure projects to pick up the slack. Engineering firms competed fiercely for what work there was and the industry’s profitability crumbled. Cardno’s EBITDA margin, a measure of operating profitability as a percentage of net revenue, fell from more than 15% in the boom years to around 10% in 2015.
This shouldn’t have been a large problem. In a cyclical industry like Cardno’s, wild fluctuations in profitability are to be expected. But Cardno was carrying a lot of debt. In June 2015, gross debt stood at $400m (net debt was $320m), while the business had less than $700m in net tangible assets.
With lenders increasingly likely to ask for their money back and mounting evidence that Cardno had overpaid for many of its acquisitions, investors dumped the stock. Cardno’s market capitalisation fell to $250m in June 2016 (it has recently recovered to around $500m).
Crescent shows credibility
Private equity firm Crescent Capital now owns about half of the company’s shares following a partial takeover bid and two highly dilutive capital raisings. Crescent’s managing partner, Michael Alscher, is now Cardno’s chairman. And his firm appoints two board members as well as key managers.
Given Crescent’s controlling stake and private equity firms’ reputation as shrewd but ruthless, it was surprising and pleasing to see how much effort Crescent put into Cardno’s AGM.
The meeting was held on the 27th of October in Sydney. The location and catering were appropriate for a company facing tough times and after the customary chairman’s statement, Alscher explained what Crescent is doing to turn around the company’s fortunes. He was clear and to the point.
Next the directors outlined their specific areas of responsibility under Crescent’s plan. It was then the turn of CFO Peter Barker, who clarified the more quantitative slides for the audience. Finally, management answered shareholders’ questions straight and in plain language.
This might seem normal but my experience is that many directors and managers lack the skills, or willingness, to communicate effectively with shareholders. Even more so when those shareholders are not professional investors.
AGMs provide valuable insights
By October, when the AGM season kicks in, analysts are focusing on the new financial year and beyond. And fund managers have typically already met with the management following the full-year results and often voted their shares online prior to the meeting.
The Chairman’s statement, presentation slides and voting outcomes are all available on the ASX website shortly after the meeting. And the Q&A sessions are usually uninspiring. So why bother attending?
There’s a lot to learn from how directors and managers address shareholders, especially smaller ones. The ability to break down complexity can demonstrate a deep understanding of the business and what’s required for it to prosper. Clear, concise presentations show commitment and care.
The way directors answer shareholders’ questions is also worth paying attention to. Are they on top of the business’s accounting policies? Are they hiding behind jargon and acronyms? Are they accountable for bad outcomes? Are they quick to blame external factors such as the economy or political instability?
Cardno’s AGM indicated that Mr Alscher and his team have every chance of turning around this struggling business.
The Forager Australian Shares Fund owns shares in Cardno.
3 thoughts on “Crescent Shows Value at Cardno AGM”
Good to get feedback from the AGM, Crescent has supported the business though I question the 40% discount to each raising and the need to move to a position of zero net debt. As a shareholder I like to see conservatism but panicked minorities probably didn’t understand that at the time.
I don’t see this as a “turnaround” as such, more a case of selling or closing loss making operations like Caminosca. The underlying performance of much of the business has remained strong throughout.
Strong enough to carry some big losses from the troubled bits.
The tight oil sector in the U.S is recovering strongly so PPI may be breaking even or returning to profitability by now.
I am sleeping easy on this one at 25% of my portfolio. It was a rediculous price at 50c.
I like AGMs for the chance to pigeonhole the CEO or board members after the meeting while oldies head for the pastries.
Whether they stop to answer your questions is a factor for me as well.
Clearly you are doing the right thing by your clients picking companies like this one at these sort of prices so well done.
Where was the AGM held (in a car park ?) and how stingy were the refreshments ?
Good to see some discussion about a difficult investment decision (i.e., a formerly acquisitive, and, until recently, indebted company that is trading on attractive but not crazily cheap metrics); rather than an easy one like Bellamy’s.
Although the best results in value investing are achieved from making easy decisions (especially when you don’t have a huge amount of capital to work with), the difficult decisions are the ones that are the most instructive.
I make a point of allocating a modest but meaningful portion of my portfolio to difficult choices purely to keep my investing acumen razor sharp. Mathematically, it’s a tiny drag on total performance in the short term, but long term, it’s well worth it.