The Investment Column: Record-breaking Amec offers a sound service

Eaga; Sports Direct
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The Independent Online

Our view: Hold

Current price: 685.5p (+30.5p)

Most investors still think of Amec as a construction company, and for a long time that was its most conspicuous operation. But it sold the last of its construction businesses to Morgan Sindall in July and is now a focused project management and services group, servicing a broad range of customers in the oil and gas, mining and power generation industries as well as environmental consultancy services.

The restructuring has clearly had the desired effect. First half pre-tax profits soared by 127 per cent to £48m, with record performance across the three remaining divisions as market forecasts were beaten on almost every level. Revenue was also better, up 14 per cent on the same period of 2006 to £1.14bn.

The streamlining of the business has resulted in a huge pile of cash burning a hole in Amec's pockets – £600m to be precise – and although not all of the money will be available until the end of the year, the company must consider major acquisitions or return a significant chunk to shareholders. Amec has been linked with bids for several mid-cap oil services rivals and, given its strong balance sheet and new focus on the oil and gas sector, a bid makes sense.

Despite one or two hiccups as far as recent results go in the oil services sector, it remains an industry with exciting prospects. But Amec still has much to do if it is to justify the current market rating. The stock has more than doubled in value over the past 12 months and now trades at a racy 19 times forecast 2008 earnings, a significant premium to other stocks in the oil services sector. Although most analysts were impressed by the results, consensus forecasts are only set to rise by 5 per cent.

Amec is certainly moving in the right direction and current investors ought to give management the benefit of the doubt and hang on, particularly now that the £100m share buyback programme has also been reinstated. But for new investors, there is better value in the mid-market. Hold.



Eaga

Our view: Buy

Current price: 215p (-1p)

Perhaps it isn't surprising that the float of Eaga at the start of June passed under most investors' radar screens. It was rotten luck to list just as the markets began heading south, but getting a £500m initial public offering away was no mean feat.

Eaga identifies low-income and vulnerable people and then finds ways to make their homes more energy-efficient. Since the company's inception in 1990, it has helped 5 million people to cut their fuel bills by anything up to half, drastically reducing the number of people in the UK who are deemed to be in "fuel poverty", defined as spending more than 10 per cent of their disposable income on fuel.

Eaga manages the entire process, from identifying those in need to implementing, managing and maintaining the entire process. The company has two main divisions – government contracts and installation services on behalf of local authorities and utilities.

It might seem odd for utilities to partner a company that cuts its customers' bills, but growth has been driven by regulatory changes and social need. It is far better to have customers who are able to pay their bills than to be cutting people off, and there are severe financial penalties for missing carbon-footprint targets.

Interim revenues rose 36 per cent to £482.6m, boosted by acquisitions. Pre-tax earnings were 59 per cent higher at £31.3m, although thanks to several exceptional costs, flagged ahead of the float, it recorded a pre-tax loss of £87.4m. The balance sheet looks exceptionally strong, with zero debt and approximately £30m of cash.

The shares are not cheap, trading on approximately 20 times forecast 2009 earnings. But this debut set of numbers is very encouraging and this is about as ethical and environmentally-friendly as the stock market gets. Far from being a flash in the pan, Eaga has 17 years of growth and with a fair wind behind it the future looks bright. Buy.

Sports Direct

Our view: Sell

Current price: 137.75p (-1.5p)

It might seem a little late to recommend a "sell" on Sports Direct – the shares have tanked since floating back in March and investors have endured a first six months that has been little short of farcical. However, yesterday's earnings alert from the sportswear manufacturer Umbro sends even more bearish signals.

Umbro has warned, just like Sports Direct did in July, that the poor summer weather has impacted sales and that the lack of any major summer football tournaments will result in a stock overhang of England shirts. Should England fail to win its next two European Championship qualifiers, the consequences for shirt sales aren't even worth thinking about – Umbro warned of a potential £15m profits hit.

The blame for much of Sports Direct's woes since coming to the market has landed squarely at the feet of its founder, deputy chairman and majority shareholder Mike Ashley, and it is hard to generate much sympathy.

With his investments in Adidas and Newcastle United, Mr Ashley has taken his eye off the ball just when his business needed him most, and the wet summer has compounded investors' frustrations.

The company is expected to generate 14.6p of earnings per share in the current year, putting the stock on a forward multiple of under 10 times. Cheap, certainly, but with good reason. Profit warnings rarely come in singles and another earnings alert would come as no surprise.

For the insanely brave, it might be worth picking up some Sports Direct shares in the hope that things aren't as bad as they look, but for everyone else this is not a stock worth backing. Sell.

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