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Revived Redhall a play on recovery

SHARE TIP: Redhall (RHL)
March 8, 2012

Specialist engineer Redhall has been through an awkward period. Rapid expansion on the back of acquisitions in 2007 came unstuck when the UK's economy went into reverse in 2008 and 2009. But a period of consolidation, the potential resolution of a disputed contract and the imminent commencement of contracts for the UK's next generation of nuclear-power plants suggest recovery is on its way.

IC TIP: Buy at 106p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points
  • Favourable close to contract dispute in sight
  • Order book set to grow fast
  • Big opportunities in UK's nuclear-power programme
  • Focus on resilient sectors
Bear points
  • Timing of new nuclear opportunities fuzzy
  • Process division remains tough

Certainly, Redhall's executive chairman David Jackson could not be more confident. At the presentation for the group's 2010-11 results in December he said: "We are on the cusp of the biggest opportunity in the engineering industry for decades with the commencement of the UK nuclear new-build programme. We have the best tender prospects that I have seen in this business and an order book with good gross margin potential." At the end of September, the company's order book was worth £116m. Yet analysts at broker Canaccord Genuity reckon there is another £200m of business in the bidding pipeline, much of which could become firm orders by the end of the year.

Redhall's trading performance improved markedly in the second half of 2010-11 and this is reported to have continued into 2012. The company offers specialist engineering services through three divisions: defence, energy and the process division. Prospects in the first two look strong; conditions for the process side are tougher.

The energy division was hit in 2010-11 by the loss of the Vivergo Fuels contract, an £18m deal to supply pipework for a huge bio-ethanol plant near Hull. Redhall was sacked last March as the project fell behind schedule, but a court has ruled that the termination was unlawful and Redhall's bosses hope the issue can be resolved soon. They made an £8m provision in last year's accounts to reflect the contract's loss, but now Canaccord's analysts think the compensation could be as high as £15m.

REDHALL (RHL)

ORD PRICE:106pMARKET VALUE:£31.6m
TOUCH:103-106p12-MONTH HIGH/LOW:143pLOW: 55p
DIVIDEND YIELD:4.8%PE RATIO:6
NET ASSET VALUE:126pNET DEBT:27%

Year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20091295.114.24.4
20101454.512.04.8
2011118-8.1-23.5nil
2012*1275.615.0nil
2013*1346.417.15.1
% change+6+14+14

Normal market size: 2,000

Market makers: 9

Beta: 0.6 * Canaccord Genuity forecasts

The energy division's principal activity is at the Sellafield nuclear plant in Cumbria, where it carries out maintenance and engineering work. New nuclear represents a huge opportunity for Redhall and it is already bidding for pipework contracts at Hinkley Point C in Somerset with French partner Nuvia. Another joint venture is also bidding at Hinkley C for contracts worth up to £25m to Redhall, and the company is seeking a third partner for £50m-worth of contracts. True, the timing of new nuclear contracts is always fuzzy. Even so, the nuclear build programme should produce further significant opportunities over the coming 12-18 months.

The defence business remains positive, with revenues up 19 per cent in 2010-11. Work with the Atomic Weapons Establishment at Aldermaston and BAE Systems at Barrow looks secure, with Aldermaston funded up to 2015 and the Astute submarine project at Barrow likely to keep Redhall active until 2020.

Activity in the process division, which supplies commercial clients in food processing and chemicals, has been more subdued. But heavy spending programmes for the UK announced by Kellogg and Mars are encouraging and a £25m five-year maintenance contract with chemicals business Huntsman started in January.