With interest rates set to normalise in the UK, Europe and America over the next few years, investors need to look to emerging markets (EMs) for growth. That said, corporate governance is notoriously poor in many of the frontier countries. So why not opt for jurisdictions that are not only geopolitically stable and ship-shape financially, but also offer exposure to urbanisation and industrialisation?
Take Australia. It fits the bill perfectly with GDP motoring along at a healthy 4% clip and interest rates at a comfortable 4.75%. Much of its success is thanks to robust exports of coal, iron-ore and other commodities to China and the rest of the world. But what’s the best way to cash in?
One approach is to pile into the miners. However, at current prices this well-trodden trade should be left to the lemmings. A better way in from a value perspective is to pick up shares in Australian infrastructure consultant, Coffey International.
The firm provides advice on civil engineering projects, and has operations in Australia (estimated 50% sales), AsiaPacific, Africa, Europe, the Middle East and the Americas. It boasts deep-domain expertise in the mining, construction and environmental sectors. All told, it employs around 4,000 staff, including surveyors, architects and geologists, to build assets such as mines, railways, roads, airports, docks and sporting stadiums.
However, over the past 12 months Coffey has caught a cold thanks to severe government cut-backs. More recently there have been order deferrals and cancellations thanks to the freak floods in Queensland. But although the shares have collapsed to seven-year lows, the future looks brighter
Gamble of the week: Coffey International (ASX: COF)
Last week, the chairman, John Mulcahy, said the company had won “significant” new contracts. He added that “delayed projects would recommence”, and “spending on rebuilding infrastructure from the floods” would also soon lift performance. Better still, costs are being stripped out with savings of A$18m a year expected. Granted, a double dip and adverse forex movements could hit profits. Net debt at A$104m also needs to be watched – the company has just extended its banking facilities to February 2014.
Overall, with the resources sector expected to be a key driver of growth in the medium term, I reckon Coffey can achieve fee revenue and EBITA of A$530m and A$40m respectively in three years. Using a profit multiple of ten, discounting back at 12%, and adjusting for the debt, its fair value comes out at about A$1.35 per share. Moreover, with much of the firm’s assets located in Australia, don’t be surprised to see an international rival (eg, US players Atkins or Hyder) knock at the door as the sector consolidates.
Recommendation: SPECULATIVE BUY at A$0.82 (market cap A$109m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments