BULL POINTS:
■ Decent prospects in UK's regulated industries
■ Potential to widen margins in the US
■ Recovery potential in Middle East
■ Share rating historically low
BEAR POINTS:
■ UK still the biggest part of the group
■ Spending constraints in US and UK
Shares in WS Atkins tumbled after the engineering consultant reported torrid trading in the UK as part of its results for 2010-11. However, the share price setback could prove a good opportunity to buy into a story of efficiency gains, growth in overseas markets and, eventually, cyclical recovery in the UK.
First, the difficulties faced by Atkins, which advises on a wide range of big building projects, including London's Olympic Park. Its chief woes lie in the UK, where the group generated 58 per cent of its revenue last year and 51 per cent of its profit. The government's austerity programme has caused many projects to be delayed or cancelled, which was reflected in a 6 per cent drop in UK revenues last year. Staff numbers fell by 7 per cent, which means turnover is likely to fall again this year, and profit margins narrowed from 7.9 per cent to 6.6 per cent.
| IC TIP RATING | |
|---|---|
| Tip style | Speculative |
| Risk rating | High |
| Timescale | Long term |
| What do these mean? Find out in our | |
These are not good numbers, but at least Atkins' bosses think the UK has finally stabilised. And there are some bright prospects in the UK's regulated industries - both the rail and water industries, where Atkins has a strong presence, have substantial capital spending in the pipeline. Besides, Atkins has some aces up its sleeve, which could spice things up for shareholders in the meantime.
| WS ATKINS (ATK) | ||||
|---|---|---|---|---|
| ORD PRICE: | 749p | MARKET VALUE: | £750m | |
| TOUCH: | 748-749p | 12-MONTH HIGH: | 831p | LOW: 645p |
| DIVIDEND YIELD: | 4.0% | PE RATIO: | 11 | |
| NET ASSET VALUE: | 16p | NET CASH: | £123m | |
| Year to 31 Mar | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 1.31 | 91.9 | 67.9 | 24.0 |
| 2009 | 1.49 | 102.7 | 86.1 | 26.0 |
| 2010 | 1.39 | 96.6 | 79.5 | 27.5 |
| 2011 | 1.56 | 91.0 | 74.3 | 29.0 |
| 2012* | 1.76 | 93.7 | 70.8 | 30.0 |
| % change | +9 | +3 | -5 | +3 |
Normal market size: 3,000 Matched bargain trading Beta: *Espirito Santo forecasts | ||||
First, in October, the group acquired a US business, PBSJ. The business seems to be trading decently; more important, its medium-term prospects look attractive based on the need to replace the US's ageing infrastructure. In the shorter term, the acquisition also has the potential to boost the group’s performance through improving its profit margins. Currently, US margins are just below 5 per cent. While it's unlikely those margins would fatten to the best levels that Atkins generates, management reckons there is definite scope to boost them. That could be enough to ripple through meaningfully to Atkins' earnings per shares because US revenues now account for 17 per cent of revenues, with just a six-month contribution from PBSJ.
Atkins’ strong presence in other overseas markets provides further potential to boost performance. There are clear signs that the Middle East market is recovering, helped by high oil prices and the incentive to improve infrastructure in response to political unrest. Atkins is long established in the region, which generated 9 per cent of its revenue last year.
The group is also doing well in the Asia Pacific region, where it generates 10 per cent of revenue. And, despite worries of a backlash against nuclear power, prospects for its energy business, which accounts for 6 per cent of last year’s revenue, are said to be “very good”.
