CCI Holdings (CHL) Is a coal service stock which typically does...

CCI Holdings (CHL) Is a coal service stock which typically does very well during a strong coal cycle. This has been the case since early 2004, but strong performances from all the operating companies under the CCI banner has been overshadowed by upheavals in the holding company. Over recent years the company hadd found it difficult to fund the growth opportunities which were being presented in its marketplace and had fallen behind in it's tax obligations to the ATO, which had become in effect a further funding facility, but one which was incurring interest at 11-12%. The board had beeen moving towards asset sales (selling two of its operating subsidiaries CCI Pope and CCI Engineering) which would have allowed repayment of back taxes to the ATO which had balooned to around 5M and also allow a return to paying dividend with a 2c ff dividend proposed for 04/05. The company was undertaking a capital raising in May/June 04 to satisfy it's bankers who were becoming concerned that the repayment of debt to the ATO was actually ranked ahead of repaying their finance facility, and demanded 2M be paid off their finance facility. Shares at 2 for 7 were offered to shareholders, but there was a substantial shorfall which was then allocated to two sophistocated investors - Mr and Mrs S.Hughes (of which S.Hughes recieved a board seat) and London City equities (a small publicly listed investment company seeking out strategic holdings in underpriced growth stocks).
Mr. Hughes was not in favor of the asset sales of CCI Engineering or CCI Pope to fund the repayment of debt to the ATO. Subsequently the majority of the board were moved to change their strategy towards a further capital raising to remove this debt to the ATO. The existing chairman was relieved of his executive position and at the subsequent 2004 AGM was voted off the board. at this time Mr Hughes was voted in and P.Murray (The LCE chairman) was also voted onto the board and became the chairman for CCI.
With Mr Hughes and Murray now at the CCI Helm, they took to making accounting changes at the company. Dubious asset valuations on the balance sheet were written off, and amortisation of capitalised deferred expenses were accelerated. Hence, for 2005 the company made an 8.6M loss while the performance of all its subsidiaries at the operating level was excellent. This of course has caused the shareprice to lag behind where it should be. Interestingly the capital raising in 2005 issued around 37M shares at 12.5c offered on a 2 for 5 basis to shareholders (to repay the 5M outstanding to the ATO). The prospectus was very guarded, with no earnings forecast given, and no dividend proposed for the forseeable future. Mr Hughes and LCE however underwrote this offer, and not surprisingly there was a substantial shortfall from shareholders not partaking in the offer to take up shares at 12.5c. These top two shareholders now own about 27% of the company combined. The company made 5.05M EBITDA for 04/05 as forecast, and has started this FY very well, budgeting for a stronger operating profit for 05/06. It would not be unrealistic to expect EBITDA of 7M for 05/06, and with the company just capitalised at 22M (shareprice of 17c), their Price/EBITDA multiple is just over 3 times.....EXTREMELY CHEAP!!!....considering other services stocks such as WOR,TSE and UGL (which have inferior sales/EBITDA margins in comparison to CHL) are capitalised typically at 16-20 times their 04/05 EBITDA.....
I would suggest their are a few reasons why this stock is still underpriced:
1. There is litigation between the company and the ex chairman whose employment was terminated by the board last year. Until this is settled it is probably not in the interest of the company to talk about a bottom line profit or a dividend.

2.The company made substantial bottom line losses in the lat two financial years (these were accounting losses due to abnormal non recurring writedowns, not operating losses but still the market does not like red ink).

3. the company has not paid a dividend since 2002.

4.The company is small (capitalised at just 22M) and is thinly traded.

I believe the litigation will be settled this year opening the way for the company to provide earnings guidance and possibly re-introduce a dividend payment....certainly there is now scope for this with the recent repayment of the ATO debt providing an additional 3.3M in cashflow which can be directed at growth opportunities and further debt reduction or a dividend distribution.

With the export coal markets being strong and growth already factored in for the next 5 years (Australia is expecting to increase coal exports from the current level of 260MTpa to around 360MTpa by 2010, with CCI having a monopoly share on providing certification tests for over 50% of this coal) CCI has very good inherent growth which really should see it be able to capture a P/E ratio of 20-25 once they return to bottom line profits and dividend payments, which should occur this year once the litigation I mentioned is settled. This is an extremely good LT investment option atm with no real downside risk, but very strong price growth potential.

Personally I have a large shareholding in CHL (average 14.8c) which I am holding for thr LT growth which is just commencing now.