CardnoCleaning up in 1H11Event * We preview the 1H11 result for...

Cardno

Cleaning up in 1H11

Event

* We preview the 1H11 result for Cardno, which is due to report on 17 Feb.

Impact

* US driving earnings growth: Cardno issued 1H NPAT guidance of $29?31m in late October, citing the positive impact from the newly acquired ERI and ENTRIX businesses in the US that are heavily involved in the response to the Macondo oil spill in the Gulf of Mexico. Our 1H NPAT forecast of $30.7m (up 90% on the pcp) assumes earnings contribution from the US operations of A$21.3m. A key variable in the full-year result, and into FY12, is the level of underlying activity in the US in H2. The US engineering and construction markets continue to recover from the effects of the GFC which should assist the 1H result.

* Australian division end market overall positive: We forecast the Australian business to grow ~15% in 1H through both organic growth (~6%) and the full period contributions of the FY10 acquisitions (ITC and AUS). Australian Engineering Construction continues to see the positive effects of the mining boom with the value of engineering construction work yet to be done for the private sector currently at all-time highs.

* QLD floods set to benefit: Cardno derives ~ 50% of its revenue from physical infrastructure, including 21% from transport and bridges. In our view, services likely to be in demand include geotechnical and material assessments, and the redesign and re-engineering of extensively damaged structures and infrastructure. On the downside, project delays will have some negative impact.

* In our view, Cardno will be an overall net beneficiary of work arising from the reconstruction in Queensland. The size and duration of benefit is hard to quantify, at this stage, and we will be looking for detail at the 1H11 result.

Earnings and target price revision

* No changes.

Price catalyst

* 12-month price target: A$ 6.03 based on a sum-of-the-parts methodology.

* Catalyst: 1H11 result 17 February.

Action and recommendation

* The stock has run hard in recent weeks, which in our view, is likely to be due to perceived benefits from the QLD floods. While we view CDD as being a net beneficiary of the flood reconstruction, we will look for detail at the 1H11 result before reviewing our forecasts and investment view.