Hi Edge as you will probably be aware, my sentiment regarding...

Hi Edge as you will probably be aware, my sentiment regarding Norfolk is very positive. I am bullish from the view that this company can be purchased well below its core intrinsic value.

A highlight from the 2012 Top 20 shareholders which contain a great mix in style of investor, but mainly supportive of value investing as opposed to trading. This is because of the large discount (even Perpetual $1.10 entry was a large discount.) There are very few companies that offer such a discount, especially when considering Norfolk is a non resource company, with a very solid ROE in excess of 20%, Net Cash Positive, NPAT growth outlook of “at least 10%” expected EBIT growth of 20%, Record/Substantial Order Book and Pipe Line.

Hastie is no more; Haden has disposed of non-performing business units (written off 2010 & 2011) and have continued to improve their cost base and margins as evidenced between 2011 and 2012. Haden competed in some of the same space as the former Hastie group but Haden has been successfully moving in a different direction (as per Norfolk’s stated strategies) with improving margins and sales growth as evidenced by their 28% increase in their current order book.

Regarding Hastie/O’Donnell Griffin, without meaning to be dismissive of your observation, ODG is a class operation that are the leaders in their field and any potential overlaps regarding Hastie would not have any impact on ODG’s margins or revenues as I see it. The two companies specialize in very different areas of the market.

Goldman Sachs reported in late November last year regarding their outlook on Norfolk for FY12 ;

“We think that the ongoing inactivity in the commercial HVAC market is the key reason why the recovery in the Haden business may not be seen in 2H12. For this reason we expect that FY12 NPAT growth will be at the low end of Norfolk's guidance range.
One other issue that is likely to keep a lid on NPAT growth in FY12 is the timing of profit recognition on contracts in the ODG business.
As previously mentioned, Norfolk's conservative contract profit recognition policy means that profitability (and margins) can be lumpy and we therefore expect that ODG's EBIT margin will be lower in 2H12. Note, however, that this should reverse in FY13 as key ODG contracts move beyond the 50% complete point and profits are booked”

Goldman have since (post 24 May 2012) forecast Norfolk’s EBIT margin to expand. Pretty much in line with their above November comments.

Edge regarding your concern on Cash Flow, I agree that is something to watch for, but I was not to surprised in light of the expected EBIT miss as they are both derived from the same source and that is Norfolk’s very conservative “profit recognition policy” as per the above comments. Operating cash flow at $11.5ml was down approximately 60% on the PCP due to “profit recognition” and the larger contracts that in particular O’Donnell Griffin has undertaken which naturally creates increased capital requirements and incur longer payment cycles. A little bit of the old saying - of being a victim of their own success (at least in the short term)

Another comment recently by GS;
FY13E EV/EBIT multiple is around 4x which offers compelling value. Norfolk’s O’Donnell Griffin (electrical engineering) business is a high quality asset with M&A appeal in a sector with a consolidation potential.

Also just to repeat from a previous post where RBS updated and highlight similar observations.

"This update by RBS post Norfolk's lastest FY12 results;

SHARE CAFE COMMENTARY
NFK - RBS Australia rates the stock as Buy
BY BROKER NEWS - 25/05/2012
Get More Commentary, Dicussion & Market Information On -
• NFK - NORFOLK GROUP LIMITED

RBS Australia rates the stock as Buy -

The broker notes the 1H result came in at the bottom of the guidance range, although still in line with RBS. However, the broker sees any issues as being temporary, not structural and blames the number of new projects the company has kicked off.

The record order book looks great, says RBS, who sees solid support for FY13 forecasts. With shares trading at just 3.8x earnings, the broker sees compelling value on offer. Buy call and target maintained.

Sector: Commercial Services & Supplies.

Target price is $1.49.Current Price is $1.01. Difference: $0.48 - (brackets indicate current price is over target).

If NFK meets the RBS Australia target it will return approximately 32% (excluding dividends, fees and charges - negative figures indicate an expected loss)."

Apologies if I have been to repetitive but hope this helps with your decision making.