Cardno’s FY09 was a good result under difficult circumstances,...

Cardno’s FY09 was a good result under difficult circumstances, but the easy yards have been made. There was always going to be a bounce from the gloomy outlook 6 months ago. The All Ords has jumped 41% since the beginning of March and Cardno 46%. So a fair bit of the share price improvement is a case of a rising tide lifting all boats.

Looking forward, I’m not so confident that we can assume Cardno’s (or sector) P/E’s will jump to 12 to 13. The sector P/E is currently around 10, and I see no justification just yet for that to change (we’re yet completely out of the woods). Cardno’s steadily decreasing ROE over the past 4 years and the ‘broadbrush’ treatment of goodwill impairment in the FY09 financial statements (particularly for the US assets) are also things that need to be worked through in FY10.

There are examples however elsewhere in the sector (eg, VMG) to demonstrate the market appreciates forthright reporting, warts and all. Its share price has increased 170% over the same period. VMG came clean on goodwill impairment and bad debts, and has seen its share price recover when reporting it had taken steps to get its house in order. It has disclosed significant goodwill impairment, off-loaded under-performing units and has an order book already at 75% of forecast revenue for FY10. It’s P/E based underlying FY09 performance is 3.0. With WA operating margins expected to be restored to at least average historical levels over the next 1 to 2 years, there is plenty of blue sky. Unfortunately, I don’t see the see similar drivers for CDD, but would welcome them when they appear.

[Position disclosure applies to both the above stocks. Sentiment to CDD only]