Mining boom has some champing at the bit
This column has reported a number of mining services executives champing at the bit with the upcoming boom of activity about to hit the resource-rich WA economy. But there is probably no one more enthusiastic than Global Construction Services' managing director, Enzo Gullotti.

Although his company is rather short on its “mining services” credentials, Gullotti's team, which combined owns about 60 per cent of the company, is working feverishly to correct this.

The company has historically provided scaffolding for Perth residential and commercial developments such as the Fiona Stanley Hospital. These days it is trying to put its fingers in as many pies as possible, embarking in the business of “mining services”, or providing mining projects with trucks and tractors, to take advantage of the “billions and billions of dollars” (in Gullotti's words) of work hitting the West from mining and infrastructure projects such as Chevron's $43 billion Gorgon gas project.

In April GCS raised $18 million from institutions at $1.80 a share, partly to finance the purchase of a labour hire group, which Gullotti says gives the company the one commodity that is scarce in the West:

“Growth (here) is going to be based on people's access to labour.”

Some clearly agree. Earlier this month the Commonwealth Bank lodged a substantial shareholder notice with a 5.4 per cent stake. Other shareholders include Atom Funds Management and Macquarie.

At $1.63 before today, GCS shares are below the placement price, possibly due to the recent weakness in the overall market, as well as the dilution of the shares it issued. But there is no doubt that trading on a one year ahead price-to-earnings multiple of about 9 times and with a forecast dividend yield of 4.5 per cent, the company looks good value.

The question investors must ask themselves is management's ability to tap into the resources market, bearing in mind that in the current year to 30 June only about 15 per cent of earnings should come from this division. This is forecast by West Australian broker Euroz to grow to 27 per cent over the next couple of years.

GCS is clearly a company that has good relationships in construction and likes to style itself as a “mining services” business. It will need all of Enzo Gullotti's vim to make that the case. Certainly some big guys are betting that he will succeed.

From hero to zero

Retail Food Group, a franchisor whose brands include Donut King, Michel's Patisserie and bb's café, is one company that has gone from market darling one day, to pariah the next.

In February RFG announced a record interim profit of $13.6 million on revenues of $33.7 million. It also increased its half-year dividend by 33 per cent to 7 cents a share.

Pretty good stuff. But then the company announced an ill-conceived bid for serviced apartment operator Oaks Hotels & Resorts on 9 May, which it withdrew a week later because of a technicality.

RFG shareholders may have been saved from taking a bullet, but the share price activity proves that management have a massive job in front of them to regain trust.

Trading at $2.33, the coffee shop retailer's shares have plummeted over 22 per cent in the past month. Right now its shares look unbelievably cheap, trading on a one year ahead PE of below 8 times and on an 8 per cent dividend yield.

Let's look at why the current mistrust exists.

Oaks (ASX code: OAK) runs serviced apartment operations in Australia, New Zealand and Dubai. RFG recommended the bid, but to say they were opaque on the so-called “synergies” it envisaged, is an understatement. The two businesses are completely different.

If the acquisition had gone through, RFG would probably have had to ask its shareholders for money. Oaks has more than $68 million of debt expiring on 30 July 2011.

Most importantly on the score of mistrust, there was the significant perception of a conflict of interest. When the bid was made, two of RFG's directors, John Cowley and Colin Archer, were also directors of Oaks.

When questioned RFG director and corporate counsel, Nigel Nixon was adamant that none of the shareholders contacted by the company had a problem with the conflict of interest. He also did not rule out a future bid being outside of the food sector.

These comments may not allay investors' fears and maybe, as one fundie said, the only thing RFG can do is, “make an acquisition that does make sense”.


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