Atkins is too cheap

The £206m acquisition of Energy Solutions' PP&T business substantially increases Atkins' presence in the nuclear market, especially in North America where Energy Solutions is based. This is a boost to the group's strategic ambition of winning more nuclear work and should also help bolster its energy division in the face of falling demand from the oil and gas industry. Broker Numis forecasts that the deal, which should complete following regulatory clearance in the first quarter of this year, will lift cash profits from Atkins' nuclear business to one-fifth of the group total by 2017. What's more, the broker expects the cumulative number of plants decommissioned by 2030 to more than double, providing long-term growth opportunities from this market. Meanwhile, Atkins has told shareholders that the acquisition should produce a double-digit uplift in earnings in its first full year and analysts have upgraded their profit forecasts accordingly.

The timing of the acquisition is welcome as the energy division has suffered due to delays and increased competition in the oil and gas market. The first half operating margin at Atkins' energy division, which accounted for just over a tenth of last year's revenue and 15 per cent of profit, fell from 10 per cent to 7.3 per cent. However, oil and gas is becoming far less significant for Atkins, with broker Peel Hunt forecasting that it will account for just 2 per cent of revenue by 2017 as nuclear work becomes ever more significant.

The weak oil price is also cause for concern for Atkins' business in the Middle East, where 12 per cent of group sales are generated. However, so far this market has remained buoyant even though decision-making has slowed. And Atkins feels the region's need to invest in infrastructure to support growth and economic diversification will continue to support its operations. Meanwhile, the first half saw a decent performance in Asia - which accounts for 6 per cent of sales - despite the slowdown in China. And increased bidding activity in North America, where nearly a fifth of sales are generated, had started to yield results at the half-year stage, albeit at the cost of a short-term squeeze on margin.

The group's largest market, the UK and Europe - which accounts for more than half of revenues - has proved encouraging recently and much of the growth Atkins is achieving is in relatively defensive areas. The group provides engineering services for a range of key infrastructure projects, which is driving healthy profit growth. The engineering consultancy received a welcome boost from increased government spending on infrastructure, with recent contract wins including the appointment by Highways England to provide detailed design services for the £1.5bn A14 Cambridge to Huntington upgrade programme. Atkins water, ground and environment business is benefiting from a healthy pipeline of work from water utility companies, including United Utilities and Thames Water, as they begin their operational upgrades for the 2015 to 2020 regulatory period.

Improving margins is an important focus for management. One of the ways the group has done this is by setting up a centralised system that allows management to appoint employees to work on different contracts around the world, reducing time lag between projects. Underlying operating margins edged up from 6.4 per cent to 6.5 per cent, but management has more ambitious profit levels in mind, with a target of 8 per cent.