Amec hits some sweet spots

Elsewhere, Amec's 'Electricity Alliance West' contract with National Grid (which it shares principally with Babcock Networks) has just been extended until the end of 2017 and involves upgrading overhead power lines and underground cables across Wales and western England. The extension is worth about £650m to the joint venture, in which both Amec and Babcock each hold 47.5 per cent.

National Grid intends to spend around £20bn over the next decade on improving its gas and electricity infrastructure. While there's no guarantee that Amec will make further gains from this huge capital outlay, the extension indicates a strengthening relationship with National Grid. The deal beefed up Amec's order book by around 10 per cent to £3.6bn, although activity had been on the rise through the latter part of 2011, culminating in a £150m deal with BP and heavyweight partners (Shell, ConocoPhillips and Chevron) to deliver engineering and project management services for the huge Clair Ridge oil and gas project west of the Shetland Isles.

Amec recently signed another smaller, though significant, deal with BP to provide engineering and construction services at the Kinneil Enhanced Gas Separation facility in Scotland. The contract, at £10m, is not large, but it gives Amec further exposure to a segment of the oil and gas industry where demand for technical support is rising.

The National Grid and Kinneil deals underline the diversified nature of Amec's activities, which enable it to exploit increased activity in the mining, nuclear and oil and gas industries this year. Such broad exposure also mitigates the kind of sector-specific risk generated by deals such as Amec's tie-in with French nuclear giant EDF, which was brought into focus following the meltdown at Japan's Fukushima nuclear power plant in April.

Of course, Amec's diversified business model means its management team, headed by Samir Brikho, a former divisional chief of Swedish-Swiss giant ABB, needs to be flexible enough to respond to market dynamics. Still, the fact that Amec is making a determined push to build market share in growth areas such as subsea engineering and water services demonstrates that it's ahead of the curve.

Despite that, its share price has underperformed its peer group by around 7 per cent in the past 12 months. This could be due to worries over its nuclear contracts, or dissatisfaction at the under-utilisation of its £455m cash pile. Whatever the reason, its share rating has not kept up with its peers despite a solid operating performance; nor is it responding to rising capital spending in the group's key North American energy markets, particularly Phase II of the Kearl Oil Sands Project in Athabasca, Canada.

As a result, the shares now offer upside potential. Strip out the cash from the market value of Amec's equity and the shares are rated 24 per cent below the consensus target price set by City analysts. Nomura puts the shares high on its list of favourites and, using discounted-cash-flow tools, values the stock at 1,209p. It also expects annual earnings growth of 17 per cent in the period 2011-14.

Meanwhile, Amec says it expects profit margins will be maintained at around 9 per cent this year, so it must be targeting sales growth to fuel earnings. Revenues should be underpinned by a strong oil price. This is important because it drives marginal investment decisions for Amec's North American customers, which accounted for 57 per cent of last year's £2.95bn revenue.