inherent growth makes profits soar

Australia's main coal testing and superintending services provider CCI Holdings (CHL) is entering a period of strong INHERENT GROWTH. So what is inherent growth and why is it the BEST TYPE OF GROWTH?

Most company's grow by gaining new work, buying an additional business arm, or by investing capital into establishing a new part of their operations. With all of these types of growth there are considerable set-up costs incurred.

Inherent growth is different. It is growth caused by external factors which allows a flow on benefit to company's already feeding off the food chain in question.

Let me illustrate this by considering the growth in demand for steel caused by China, India, Brazil and Russia amongst others. This has led to heavy demand for iron ore and coking coal, and has seen the need for infrastructure expansions to deliver the higher tonnages demanded.

In round figures, 5 Australian coal ports combined (RGCT, Barney point, Hay point, DBCT, and Newcastle) will expand their capacities in stages from 220MTpa at the beginning of this year, to 277MTpa at the end of 2007.

This is an increase in volume of 26%, but the profit implications for a company who gets paid for testing this coal on a PER TONNE basis is huge.

CCI performs the export certification testing of 45% of this coal. At present they getting paid to test 45% of 220MT a year from these main 5 ports. ( 99MT). This will rise to 45% of 277MT (125MT) by the end of next year.

The reason this INHERENT growth is so valuable is because this testing process they carry out is very much an automated process which means to test 125MT costs very little more than what it does to test 99MT, but of course the company is paid at a set rate per tonne to provide this service, so as the tonnages rise the profit margins rise exponentially.

The smartmoney has been buying shares in CHL over the past two years knowing that the large infrastructure expansion works at all these coal ports would be coming on stream in the 07 and 08 FY's, and will see this company's bottom line grow sharply higher.

It is also why CPB has made a takeover bid for CHL at 31c. a bid which the CHL board describes as "absurdly low", and "grossly inadequate".

it doesn't take einstein to work out CCI are going to see their EPS go through the roof over the next 1-2 years. Currently they are trading at 13 times last years earnings, so the market as a whole is yet to notice the huge growth which is now starting.

But the market is beginning to re-rate them, with the stock climbing from 16-32 over the last 12 months. Get on board for the huge growth to come.