CDD -- The Next Two Years

EBITDA for FY2021 is forecast to be A$40-$45m. Management is conservative in their guidance so let’s say A$45m. EBITDA for FY2020 (a hell of a year) was A$43m, up 11% on a pro forma basis on the prior year.

Keep in mind that this A$45m in projected earnings no longer includes EBITDA from the QTM business (now ASX listed as ITG) that was spun off in late 2019. In FY2019 the QTM business contributed about 40% of the group’s EBITDA.

Although many here think the APAC business has been badly mismanaged, some of the problems can be traced back to poor debt funded m & a decisions made pre-2015, and the revolving door to the CEO’s office starting with Wankmuller’s appointment in June that year. But over the last five years after Crescent gained control, the company has been recapitalised (over $170m raised in 2016) with net debt eliminated. Since February 2017 almost 80m shares (about 16% of the register) at a cost of about $47m has been bought back with some strategic acquisitions along the way.# Another 40m buyback was recently approved at a general meeting.

The APAC share of FY2020 EBITDA was A$1.0m whereas the US/Canada brought in EBITDA of $A38.7m. This is where the money is being made. The new CEO (appointed just over 12 months ago) is based in US and has been with the company for 5 years. She says the US business is operating on a margin of 14% which is pretty remarkable in the current environment. Judging by US performance, she is doing a good job

If you look in the news section of the company’s website (see also www.cardnochemrisk.com) you will see that there have been new appointments in the US in the environmental consultancy area. The ChemRisk business is currently focused on COVID-19 planning including infection control, managing returns to normal workplace & recreational venue operations, and other pandemic related consulting. One of their team was recently appointed to the EPA’s Scientific Advisory Committee. I expect there will be a resurgence in environmental consultancy work in the US once the Biden administration has established itself.. The stronger A$ is a headwind.

Crescent paid $3.45 a share under its proportional takeover offer in October 2015. Through the low ball cap raises in 2016, the buy backs in 2017-2020, and the 2019 spin off, they have made up some ground, but they must still be a long way behind.

Let’s say Crescent’s plan is to hold for another two years. That would add-up to a 7-year investment. I don’t see them holding longer than that. Private equity typically has an investment horizon of four to seven years.

While it’s pretty clear there won’t be any dividends while Crescent remain in control, it’s likely the company will buy back another 80m plus shares during the next two years. That would leave around 320m shares on the register. But how much they buy back will depend on the share price. I expect they will move quickly to buy up another 40m while the price is low. In October they bought back 44m in the space of a few days at between 28.5c and 30.5c

Let’s also say by July 2022 CDD has EBITDA around $55m – that’s not at all unrealistic. On a multiple of 8 that values CDD at $440m. Even with an EBITDA of $45m, we are looking at a valuation of A$360. Current market cap is only A$136m.

Assuming 320m shares on issue, that could result in a share price of around $1.12 to $1.37 when Crescent exits.The risk reward looks good to me. Patience is required.

What am I missing?


# TGM Group A$21.6 December 2018 and Raba Kistna US$55 also December 2008. Latter was debt funded and now forms part of ITG.