Amey finds new road to success

The Investment Column

Shares in Amey, the UK's fourth-largest road-builder, have suffered in line with the Government's U-turn on the road programme. But Amey has continued to prosper, even if the market has not noticed until recently. The shares were reinvigorated last month by news Amey was paying pounds 15m for Western Infrastructure Maintenance Company, one of British Rail's seven maintenance operations. That looks a knock-down price for a group with profits of pounds 14.8m last year and is cheap when account is taken of various extra charges likely to reduce profits to a continuing level of pounds 5m-pounds 6m.

As Neil Ashley, chairman, commented yesterday, WIMU represents a "quantum leap" in Amey's facilities management and maintenance business. Already providing 61 per cent of last year's profits of pounds 5.32m, it will increase the contribution from facilities management to 76 per cent. By contrast, roads represent less than a third of the group's business.

The group has been moving away from its roots in traditional construction since at least 1991, when it first dipped its toe into facilities management. Last year it picked up the pounds 20m-a-year contract to manage a huge chunk of the operations of the city of Portsmouth. The increased mix of fee- related business from the Portsmouth work, plus the maturing of earlier contracts, helped margins in facilities management more than double to 4.1 per cent last year, despite turnover and capital employed falling in the division.

Mr Ashley expects the business to double this year and his contacts with senior Labour politicians suggest there is little threat from a new socialist government to the continued growth of outsourcing in state and local authority operations. As well as maintaining 870 kilometres of important roads, new areas for Amey could involve aircraft maintenance for the RAF, while an announcement on the acquisition of specialist health consultancy in the environment, health and safety area is expected before the end of the month.

Elsewhere, Amey's membership of the Autolink consortium with Taylor Woodrow and Sir Robert McAlpine has yet to meet with success in bidding for the Government's new generation of design, build, finance and operate contracts. But an announcement on the Croydon tram project is due this week and Amey has high hopes of winning work on the A19 and M6 routes.

Profits of pounds 9.7m this year, including around pounds 4.5m from WIMU, would put the shares, unchanged at 194p, on a forward multiple of 9. Given low barriers to entry and a claimed pounds 100bn market, facilities management will become increasingly competitive, but Amey's head start leaves it well placed. The shares remain attractive, although the market is tight.