EBIT was below expectations - 2 reasons offered; Project Delays & Adverse Weather. I dont see anything unusual in this statement and also to repeat once again; As flagged by Goldman Sachs back in November 2011 where they commented on the then FY12 Outlook - “Norfolk’s conservative payment recognition policy means that profitability (& Margins) can be lumpy and therefore expect the ODG’s EBIT margin will be lower in 2H12, however this should reverse in FY13 as key ODG contracts move beyond the 50% complete point and profits are booked.”
EBIT MARGIN down on last year, & this is tied back to the previous comment.
>OPERATING CASH FLOW was down (65%) to 11.5ml. This was largely due, to the increase in Working Capital (22.9ml) due to the larger and more complex projects undertaken with longer payment cycles. (Also there was a small increase attributable to R&D Investment.)
The Working Capital increase therefore has impacted the Operating Cash Flow and resulted in a net negative free cash flow of around (-14.5 m). This was met by Norfolk’s 2011 Closing “Cash Balance” of 25.1ml (now 10.6ml)
I think someone on an earlier post questioned Norfolk’s low Free cash flow, as only just being positive and not positively reflective of the actual NPAT result and as such added a note of caution. I took that view when looking at the cash flow (in general) and as you can see above the Free Cash Flow is actually negative, but well explained.
The area’s that I have highlighted above are therefore genuinely and principally a result of Norfolk’s ramping up onto larger new contracts (ie Strong Growth) and are more than validated by Norfolk’s (1.05bl) record Order Book and (1.1bl) Pipeline of submitted Tenders. Also of mention is the continued strong growth in the order book of all 3 brands within Norfolk and in particular, Haden’s 28% growth. Haden will have a significant impact on Norfolk’s result as it continues to emerge strongly under the new “Key Strategies” being implemented by the Norfolk Board & Management teams. We are already seeing evidence of this cross brand leverage in the recent contract wins, which will begin to appear in the 2013 results.
I totally agree with the recent post by “Roy2U” regarding Haden. A positive EBIT result (Margin) growth performance by Haden has not been priced in, and really has the potential for a substantial bottom line (EPS) surprise to Norfolk’s results which will substantially increase the SP. Haden is in much better shape after a couple of years of cost cutting & rationalisation of its business model, which WAS very dependant on the comercial property market. Haden is now being exposed to higher quality sectors offering substantial margin improvement opportunities.
There are very good levels of demand in Norfolk’s key markets. The demand in these markets, is supported by both private and public capex plans, and provides Norfolk with a good level of earnings visibility over the next two years.
Norfolk’s Order Book $1050m: Revenue derived from “Non Resource” Sectors accounts for $815m (78%) of the $1.051m. $692m (66%) of the $1.051m Revenue in the order book is “Alliance”,” Cost Plus”, “Service/Maintenance” & “Schedule of Rates” which offers considerable comfort and underpins Norfolk’s earnings. The Norfolk team has a proven track record at consistently winning contracts.
Norfolk has a consistent earnings history and consistently meets it’s outlook projections. The balance sheet and net cash position set a great platform to support earnings growth. Norfolk's board and Management team have a strong stable history with a track record as being conservative and deliberate in their guidance of this company.
FY12 ROE of 24.5% (Net profit 2012 of $22.1m / Total Equity 2011 $89.9m) and projected FY13 at 20%
NFK Price at posting:
$1.07 Sentiment: Buy Disclosure: Held
