Following a management overhaul and significant restructuring, a turnaround is beginning to take hold at consultant engineer WYG (WYG) and earnings could rocket over coming years. What's more, while currently depressed levels of profitability means the shares look expensive based on a near-term earnings-based valuation, the potential for substantial margin improvement coupled with an enterprise-value-to-sales ratio (a classic valuation yardstick for recovery investors) of just 0.4 suggests the shares actually represent considerable value.
- Turnaround plan working
- Significant margin recovery potential
- Upgrades coming through
- Net cash
- Low EV/Sales ratio
- No dividend
- High near-term earnings multiples
The company, which spans engineering services from designing roads to environmental assessment for wind farms, has undergone massive restructuring in the last few years. In 2009, a new management team came on board and the company changed its name from White Young Green to WYG. Cost-cutting, restructuring of the company's operations, and strategic repositioning towards higher-quality revenue streams followed. Capital restructuring via a share placing, meanwhile, strengthened the balance sheet and left the company with a net cash position.
Last year WYG reported an underlying profit for the first time in several years. A significant achievement was the return of the UK to profit. This region is WYG's largest and accounted for 60 per cent of group revenue. Further evidence that WYG is turning a corner came in the guidance accompanying the results that current year profits would be above expectations. Then, earlier this month, the company raised expectations again in a bullish trading update that highlighted new business wins in core UK sectors of defence and urban development, an uptick in planning and enabling work for the construction and housebuilding sector, and several new overseas contracts. WYG said that, due to this pick-up in activity, revenues are modestly up, which is a marked departure from the negative trend of recent years.
| WYG (WYG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 101p | MARKET VALUE: | £65m | |
| TOUCH: | 98p-103p | 12M HIGH: | 104p | LOW:47p |
| DIVIDEND YIELD: | nil | PE RATIO: | 16 | |
| NET ASSET VALUE: | 25p* | NET CASH: | £14.8m | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)*** | Earnings per share (p)*** | Dividend per share (p) |
|---|---|---|---|---|
| 2011** | 121 | -4.16 | -5.90 | nil |
| 2012 | 140 | -5.84 | -6.50 | nil |
| 2013 | 126 | 0.70 | 0.90 | nil |
| 2014*** | 127 | 3.90 | 5.00 | nil |
| 2015*** | 132 | 5.50 | 6.40 | nil |
| % change | +4 | +41 | +28 | - |
Normal market size: 3,000 Matched bargain trading Beta: 0.09 *Includes intangible assets of £16.3m, or 25p a share **Nine-month period ***WH Ireland estimates, underlying PBT and EPS figures | ||||
With earnings coming off a low base, there is significant potential for earnings recovery as the cost-cutting efforts and focus on higher-margin work pays off. Indeed, last year's operating profit margin of 1.4 per cent compares with a range of 7.3 to 7.7 per cent during the five years leading up to the credit crunch. WYG's strong competitive positions in markets that have bright prospects such as infrastructure, energy consulting, nuclear and defence should also help.
WH Ireland forecasts adjusted profit before tax to increase more than fivefold this year. One thing lacking at present is any dividend income as the near-term focus is on using cash to generate growth rather than pay out to shareholders. But as earnings recover, dividend prospects should also improve - WH Ireland has pencilled in a 2p dividend for 2016. By 2016, WH Ireland currently forecasts earnings per share to have expanded to 7.6p. But the broker says that in a more ambitious scenario with a small uplift to revenue forecasts and a 7.5 per cent operating margin, earnings could be nearly 13p.
