Engineering consultancy WS Atkins (ATK) is adapting to lower business volumes, trading in its core UK markets is stable, its balance sheet is strong and its dividend looks secure. So, despite tough trading in the US and Middle East and a profit warning in August, we think patient income-orientated investors should take a closer look at Atkins.
- Dividend growth potential
- Limited share price downside
- UK and Energy division stable
- Growth in Europe and Asia Pacific
- US slowing
- Middle East contract difficulties
The main attraction is clearly that dividend, which has grown at 11 per cent a year over the past 10 years. That pace of growth won't be maintained. Even so, on the current year's likely payout, the yield is almost 5 per cent. The payout currently looks secure and, if it tracks future earnings, it may grow - with some variation - at approaching 5 per cent.
The next question concerns the quality of those earnings after profit warnings from construction companies saw Atkins' share price fall 10 per cent last week. Certainly times are tough, but Atkins is well-placed to receive a steady, albeit rather slow, stream of infrastructure work from the UK government. Although Atkins could get dragged into the furore surrounding the West Coast train line franchise, noises about other infrastructure work are encouraging. Atkins says it had a "good start" to the year and confirmed in the August warning that rail and highways contracts are still coming through, with regulatory work in the water sector also helping.
The UK division is responsible for half of revenues and pre-tax profits and Atkins has slowly been increasing headcount. Meanwhile, exposure to growing overseas markets is useful. Atkins designed a new tram line in Sweden and the third runway in Hong Kong, which helped solid trading in Europe and the Asia Pacific region; these generate 10 per cent of revenue and profits. And as global demand for oil and gas stays firm, demand is buoyant in Atkins' Energy division, which is responsible for around 7 per cent of revenues and 10 per cent of profits.
WS ATKINS (ATK) | ||||
|---|---|---|---|---|
| ORD PRICE: | 649p | MARKET VALUE: | £650m | |
| TOUCH: | 648-649p | 12-MONTH HIGH: | 806p | LOW: 525p |
| DIVIDEND YIELD: | 5.1% | PE RATIO: | 8 | |
| NET ASSET VALUE: | 119p | NET CASH: | £56m | |
| Year to 31 Mar | Turnover (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 1.39 | 97 | 79.5 | 27.5 |
| 2011 | 1.56 | 91 | 74.3 | 29.0 |
| 2012 | 1.71 | 136 | 109.0 | 30.5 |
| 2013* | 1.76 | 101 | 76.0 | 32.0 |
| 2014* | 1.87 | 106 | 78.4 | 33.6 |
| % change | +6 | +5 | +3 | +5 |
Normal market size: 2,000 Matched bargain trading Beta: 1.0 *Panmure Gordon estimates (only dividends comparable with historic figures) | ||||
It isn't all success in the oil-producing regions, though. The Middle East has been hit by extended bidding processes, lower profit margins and lumpy payments. True, the long-term infrastructure story in the region remains encouraging but, as oil-rich states exercise their buying power, margins may get squeezed even more. That's a worry as the Middle East contributes 10 per cent of revenue and 17 per cent of profits.
In the US, the presidential election created a hiatus in starting infrastructure projects. That's a concern as the region is responsible for almost a quarter of revenue and a fifth of profits. One issue is legacy contracts in the Peter Brown construction business, which management has been grappling with for a year now. Then there is the bigger problem of US budget wrangling. The region looks set to struggle until matters are resolved.
