The expanded entity of Amec Foster Wheeler (AMFW) came about through a $3.2bn (£2.1bn) cash-and-shares offer from Amec for the Foster Wheeler engineering business. The deal, which was completed in November 2014, had a sound enough strategic rationale, particularly with around $75m in potential cost synergies, but negative newsflow has weighed on the group's share price since midway through last year. The markdown means that shares now trade at a substantial discount to historic earnings multiples, while offering a yield in excess of 5 per cent. We think that the current share price provides a viable entry point for investors willing to ride out prevailing negative sentiment.
- Diversified business mix
- Relatively predictable revenue streams
- Preponderance of lower-risk contracts
- Merger cost synergies to flow through
- Negative sentiment towards oil services
- Setback for Sellafield consortium
The group applies its engineering expertise to infrastructure assets across a range of industry sectors, including oil and gas, mining and power generation. The AMFW tie-up, which was initiated after Amec's unsuccessful tilt at industry rival Kentz Corp, expanded the group's oil products and petrochemicals business, while providing it with greater exposure to less-cyclical revenue streams from national oil companies (NOCs) in Saudi Arabia and the UAE. The combined group would have generated in excess of £500m in pro-forma trading profits for 2013. The combined order book of £6.3bn is comprised primarily of reimbursable 'costs plus fixed margin' contracts. These commercial arrangements, along with the aforementioned NOC revenue streams, are generally regarded as reasonably predictable. The business is therefore relatively low-risk in terms of both margins and project cancellations. It's also worth mentioning that, even prior to the merger, Amec had an extremely high rate of converting contracts into cash flows.