■ Interim underlying profits down 28 per cent
■ Middle East business to be sold
■ Strong bid pipeline
Interim results at Mouchel contained an air of spring cleaning as the support services group announced it was hiving off its Middle Eastern business and taking a £15m writedown. The group made a £10m impairment charge on contract receivables still owed in Dubai and paid £5m in costs after closing operations in the Emirate. A preferred bidder is now in an advanced stage to buy the whole of the region's business.
These one-offs, as well as amortisation costs of £3.5m, meant the group posted a £3.5m loss for the six months to end January 2010. And even after stripping out exceptionals, pre-tax profits were down 28.4 per cent to £15m as the group also withdrew from rail and the management consulting business slowed.
Future prospects look encouraging, though, despite the sideshow created by VT Group's aborted bid prior to its union with Babcock. Mouchel's joint venture with infrastructure services group, Enterprise, has just won two contracts with the UK Highways Agency, making it the biggest player in the sector. Meanwhile, at £2bn, the order book is up £100m since July and the group's win rate has been near 40 per cent. In addition, the bid pipeline is around £2.3bn. Management believes the general election could lead to a spending lull, which will be reversed in 2011.
KBC Peel Hunt says…
Hold. We remain slightly wary that despite the revenue visibility afforded by new activity margins remain under pressures, especially as profits in the regulated industries business fell 64 per cent to £2.5m after the poor performance from the Middle East and the withdrawal from rail. Our key concerns lie with the exposure to local and central government spending. Over the course of this year, we think Mouchel could suffer from the likely spending hiatus caused by the general election as well as tightening of highways spend. Furthermore, with the widening pension deficit there could be additional focus on the balance sheet.
Panmure Gordon says…
Hold. We adopted a neutral stance when the speculation of a bid from VT emerged and with the latter succumbing to a bid from Babcock, the immediate speculation has now subsided. These interim results are a good opportunity for management to get back on the front foot in terms of strategic direction. In terms of valuation, the shares trade on 7.4 times our 2010 earnings estimates, falling to 7 times in 2011, which is broadly in-line with the consultants peer group average. Expect adjusted pre-tax profits of £40m and EPS of 26.2p in the year ending July 2010.
