BULL POINTS:
■ Defensively positionedssss
■ Strong balance sheet
■ Potential for bolt-on acquisitions
■ Decent dividend growth
BEAR POINTS:
■ Facing government spending cuts
■ Relatively low margin business
Having already been hit by the downturn in the private sector, many outsourcing companies are now struggling with government spending cuts. But May Gurney is proving to be more resilient than most. It also has a strong track record of delivering value and its shares are modestly rated.
The company concentrates on doing essential maintenance work for clients. So, for example, even in highways, where budgets are being slashed and May Gurney is likely to be worst affected by cuts, the company reported a strong start to the year in its trading statement this month - thanks to a government initiative to fill pot holes. Certainly, the roads business - which generated 36 per cent of last year's sales - is unlikely to come through this period of austerity unscathed. Broker Numis Securities says a 10 per cent fall in revenue is expected. But, longer term, there's only so much maintenance work that can be put off.
| IC TIP RATING | |
|---|---|
| Tip style | Value |
| Risk rating | Medium |
| Timescale | Long term |
| What do these mean? Find out in our | |
Other parts of May Gurney's operations look far more resilient. Its waste business is winning work from large incumbent players, and earlier this month announced a £96m, seven-year contract win from Bristol City Council. Along with the £1.4bn order book, this means it looks like brokers' expectations for the year should be met. Meanwhile, the utilities business is starting on work that's related to the new five-year water regulatory review period. So Numis believes organic growth in cash profits for the group as a whole will come in at 5 per cent this year, despite the tough environment.
| MAY GURNEY INTEGRATED SERVICES (MAYG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 284p | MARKET VALUE: | £199m | |
| TOUCH: | 281-286p | 12-MONTH HIGH/LOW: | 292p | 177p |
| DIVIDEND YIELD: | 2.8% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 120p | NET CASH: | £10.9m | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2008 | 437 | 17.0 | 18.2 | 4.60 |
| 2009 | 470 | 5.20 | 3.90 | 5.10 |
| 2010 | 483 | 18.4 | 19.6 | 5.50 |
| 2011 | 571 | 18.8 | 19.8 | 6.60 |
| 2012* | 616 | 26.9 | 28.0 | 7.94 |
| % change | +8 | - | - | +20 |
*Numis Securities estimates (earnings adjusted - not comparable) Normal market size:1,000 Matched bargain trading Beta:0.5 | ||||
But May Gurney's growth won't only be organic. The group's cash pile leaves it well placed to make bolt-on acquisitions, such as its £13.6m purchase of Turriff in January. That deal fits with its strategy of expanding the range of services on offer, while extending the group's geographic coverage by providing a strong position in the gas market and in Scotland. As well as the strategic benefit Turriff brings, it is also expected to be earnings-enhancing - so Numis believes adjusted earnings per share growth will reach 13 per cent overall for the year. And more earnings-enhancing bolt-on acquisitions could be on the cards.
May Gurney's strong record of cash generation is not only boosting its ability to buy rivals. The group also has plans to boost the amount it pays out as dividends, by reducing cover from the current level of 3.75 times underlying earnings. Broker Altium Securities calculates that, over the next three years, shareholders can expect compound annual dividend growth of 19 per cent. The reality could in fact be better, as May Gurney has a record of beating analysts' expectations.
