Buy Atkins for quality and consolidation

Many of the UK's listed engineering consultancy companies have slipped on banana skins in recent years as the stop-start global economic recovery has thrown up challenges. Not Atkins. The group's underlying earnings have continued to grow, as have dividends, while a push to improve efficiency has lifted the operating margin towards the best-in-class 8 per cent target. In large part, that is due to shrewd management decisions on where best to focus the business.

Atkins has exited businesses that no longer make strategic sense. The UK highways services arm and loss-making US construction business Peter Brown were both sold off late last year. Atkins, which also exited its UK asset management and PFI businesses in recent years, said at its recent full-year results that its 'portfolio optimisation' was now mostly complete. So Atkins can now fully focus on sectors where it sees the best growth and margin potential.

Last year, the best of the top-line growth was in Asia Pacific and the energy division. It's no coincidence that these are key focus areas for the group. Asia Pacific revenues rose 14 per cent to £101m. Around £9m of that came from Singapore-based Confluence, which was acquired by Atkins in October. Confluence, which has worked on high-profile projects, including the Singapore Grand Prix and Marina Bay Sands mega-casino, boosts the group's presence in the region and also adds key programme management skills.

The energy division, meanwhile, grew revenues by 12 per cent to £170m. Atkins has a well-established presence in the oil and gas and nuclear markets, both of which are growing strongly. And the acquisition of US nuclear engineering business Nuclear Safety Associates, which is in the final stages of regulatory approval, will fulfil Atkins's long-held aim of establishing a US nuclear footprint.

The UK remains the group's biggest market accounting for just over half of its revenues. Atkins has strong market positions in road and rail and is benefiting from a healthy backlog of projects, as the government ploughs cash into infrastructure investment in an effort to keep the economy moving. Atkins is involved in work such as the UK's rail electrification programme, early-stage design work for the London to West Midlands high-speed rail link and maintenance of the M25 motorway.

The UK water sector has also been busy as water companies step up spending in the last year of their current regulatory period. Atkins is, however, preparing for a quieter time ahead when the new water pricing regime kicks in next year. The group has 'right-sized' the business in preparation and has also redeployed resources from its aerospace business, which is seeing a slowdown in work from major customer Airbus.

Ultimately, the aim is to reduce dependency on the UK to less than a quarter of the group. One quick way to do that would be through acquisitions. The net cash pile and impressive cash generation - Atkins increased its net cash by almost a third last year - certainly give it some headroom.

And Atkins could potentially be on the brink of a transformational deal. Press reports suggest Atkins is in the running to buy Balfour Beatty's (BBY) US engineering business, Parsons Brinkerhoff. The deal is complicated by the fact that Carillion (CLLN) is itself trying to merge with Balfour, but if it comes off it would propel Atkins into the big league. Broker Peel Hunt says the acquisition of Parsons would put Atkins in the top 10 global design companies and could, based on a £600m purchase price, deliver 12 per cent earnings accretion in its first full year.