Question of confidence at Amec
The Investment Column
Friday 12 April 1996
Yesterday's results for the year to December, showing flat profits of pounds 20m before the pounds 4.1m bid defence costs, will give confidence to the many shareholders who argued that Amec's future is rosy as it recovers from the bottom of the construction cycle. Stripping out the pounds 8.1m cost of preparing claims against Agip, the client on the troubled Tiffany oil platform contract, operating profits jumped from pounds 29.4m to pounds 40.9m last year.
Barring the Tiffany-related loss at the Newcastle offshore construction operation, all the businesses were ahead last year. Profits more than doubled to pounds 11.9m in the construction division add credibility to Amec's claims that the increasing proportion of design-and-build contracts in its portfolio adds value to the business. Competition for this type of business is less - typically four bidders instead of the usual 10, says Amec - fees tend to be higher and there is more flexibility in charging.
Elsewhere, the small Fairclough Homes division did well to turn losses of pounds 2.8m into profits of pounds 2.6m last year. In line with others in the sector, Amec is experiencing a sharp upturn in the market in 1996, with 13 per cent ahead this year. Anticipating the outcome of the "root and branch" review of the group currently being undertaken, new chief executive Peter Mason yesterday emphatically ruled out a sale of the housing business.
Mr Mason is confident that 1996 will be a "noticeably" better year than 1995. The group will be without the millstone of the Tiffany contract, order books are at record levels in many areas and margins are expected to improve as more profitable work taken on recently comes through to the figures.
But risks abound. Despite Mr Mason's confidence, competition continues to be intense in areas like structural steelwork and even design and build is not immune from margin pressures. It is not clear that Amec has the balance-sheet strength to compete effectively in the Government's private finance initiative against better-placed rivals like Laing and Tarmac. Meanwhile, its homes business is too small, but the write-off on a sale would probably wipe out shareholders' funds. Profits of pounds 33m this year, putting the shares on a prospective multiple of 17, is still a meagre return on sales of pounds 2.5bn. The limited prospect of a bid is the only reason for holding the shares.
Little substance at Nurdin
For an unglamorous cash-and-carry operator, Nurdin & Peacock has been the subject of a good deal of attention of late - most of it takeover talk. This has been good news for the share price, which has risen sharply this year since a February profits warning. Sadly, for investors, nothing seems to have materialised.
Booker, the rival food and cash and carry group most recently tipped as a predator, played down bid rumours last month.
The other possibility is SHV Makro, the Dutch group, which holds 14 per cent of Nurdin's stock and is now free to increase its stake. All is quiet here too and after management changes at Makro, the two no longer speak to each other.
The other block is the Peacock family which controls 30 per cent of the equity and is showing no signs of selling. All this leaves the share price reliant on the performance of Nurdin's core cash-and-carry business, which is barely treading water in a shrinking market dominated by large competitors.
Pre-tax profits of pounds 19.6m were in line with February's warning but the operating figure of pounds 24.5m is still lower than last year. Like-for-like sales were up by 4 per cent last year, but this year is proving tougher with the sales uplift slowing to 2 per cent in the three months since the year-end.
While Nurdin will continue to mop up smaller cash-and-carry operators, it is pinning much of its hopes on building its delivery business, servicing independent retailers and corner shops.
The margins are better - about 4 per cent compared with less than 2 per cent in the core business - but the key to success is building sufficient economies of scale.
Nurdin is looking to grab 10 per cent of the delivery market - equivalent to pounds 350m of sales - within the next few years. Hence yesterday's pounds 400,000 purchase of Thompson Wholesale Foods, a Manchester-based delivery group.
More deals like this are needed to help shrug off an unhelpful sales mix in the core business, which is skewed towards lower margin orders of tobacco, wines and spirits. The belated introduction of electronic stock ordering systems should also help but may not be enough.
With analysts expecting profits of pounds 24.5m this year and with the shares 1p higher at 175p yesterday, Nurdin is on a forward rating of 13. With bid hopes receding, the shares look set for a period of drift.
BP warms to higher oil prices
British Petroleum's annual meeting statement yesterday that it intends to raise its profits by a half over the next five years is welcome news for shareholders. It largely confirmed the strategic plans outlined to analysts last month, but with news of higher oil prices gave an added boost to sentiment and the shares added 5.5p to 591.5p.
The earnings target translates into 8 per cent year-on-year growth or another $1.5bn on the bottom line, something shareholders will share in directly through the group's dividend policy. John Browne, BP chief executive, said the guideline now was to pay out half underlying earnings to shareholders. He has already hinted there could be special payouts or share buy-backs if the earnings target is exceeded.
Add in plans to keep debt to below $8bn and to grow capital expenditure to close to $6bn and BP has presented a dream scenario to investors. But as Mr Browne admitted, around 80 per cent of the improvement in the past three years has come from cost-cutting and in the future the group must put more emphasis on growth. His target is for over half the uplift in performance to come through top-line expansion.
Since 1992, BP has led the industry in selling off peripheral assets and improving the focus of its capital expenditure. Its decision to merge its European refining and marketing with Mobil shows there is still scope for further innovation on this front.
But it remains to be seen whether it can achieve the same returns from genuine growth. Traditionally reliant on mature fields in the North Sea and Alaska, BP is confident it can raise production by up to 5 per cent a year and still more than replace reserves into the next century. That is a heroic assumption, even with new discoveries.
Assuming net income of pounds 2.5bn this year, the shares stand on a forward rating of 14. That looks fair value, particularly since, despite their recent outperformance, the shares have just caught up with Shell on a five-year view.
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