Investment Column: All the facts weigh in favour of Petrofac

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The Independent Online

Petrofac

Our view: Buy

Share price: 906.5p (-7p)

Petrofac once again defied all expectations with its interim results yesterday. Its order book was strong: the oil services group booked $5.8bn (£3.5bn) worth of contracts over the first half of 2009, compared with $1.7bn in the same period last year – and net profit rose by 20 per cent to $145.6m. Moreover, net margins at the group's engineering and construction division, its largest reporting segment, remain resilient.

Against this backdrop, the chief executive, Ayman Asfari, confidently proclaims that full-year earnings will grow by at least 20 per cent. Mr Asfari concedes that the order intake will slow in the second half of the year, but given the backlog of $8.4bn at the end of June the company clearly has enough to chew on. By the same token, investors have much to look forward to on earnings and profits.

The share price reflects the strength of the business. Plot a graph of Petrofac's share price against the FTSE 100 index and you'll see that while the market slumped in March, barring occasional fluctuations the group's stock has barely paused for breath this year.

Cautious investors will rightfully wonder whether it is time to book profits. We think not; besides the convincing earnings story – forecast upgrades are likely to be forthcoming in light of yesterday's update – investors stand to benefit from the group's decision in March to hike its dividend payout ratio to 35 per cent from 30 per cent. On Cazenove's estimates, the yield rises from 2.2 per cent for 2009 to 3.3 per cent for 2010 and 3.5 per cent for 2011. We see any pullback as a buying opportunity.



G4S

Our view: Hold

Share price: 216.2p (-7.9p)

Hopes were running high ahead of G4S's half-year results yesterday. The shares have been strong in recent sessions, rising 5.4 per cent over the course of last week.

The good news is that the security services group put on a positive face. Revenues and earnings were robust. The interim dividend was hiked by 10 per cent to 3.02p per share. The company was also confident about the outlook for the year ahead.

But despite a rising market, the share price relaxed, with some pinning the fall on concerns that this may be a late-cycle business and therefore still prone to a slowdown. Those arguing for the motion point to the recent trajectory of organic growth, which, as Evolution Securities highlighted, is clearly slowing.

On the other hand, performance metrics still compare favourably to the competition.

Moreover, G4S makes a clear case for growth in the second half of the year and beyond. It does not claim to be recession-proof, but it is defensive in nature. To those worried about a reduction in government spending, the chief executive, Nick Buckles, answers that instead of cutbacks, outsourcing to the private sector is more likely in tougher times.

Add to the mix the dividend yield – Collins Stewart estimates that it will rise from 3.6 per cent in 2009 to 4 per cent in 2010 and to 4.6 per cent in 2011 – and it appears too hasty to sell the shares. Still, given the worries in some quarters and the steady performance in recent months, it also appears too optimistic to buy. We say hold.



Good Energy

Our view: Buy

Share price: 32p (unchanged)

While energy suppliers large and small have woken up to the growing interest in greener supplies, only the sector minnow Good Energy can claim that its supply is 100 per cent renewable, which gives it an edge over the bigger players.

Clearly, the company is a niche player, and a natural worry in these difficult economic times would be that its particular niche shrinks, because green energy tends to be more expensive. Not so: Good Energy reported an increase in customer numbers during the first half of the year yesterday.

That increase helped the company to deliver an increase in profits for the first half, with pre-tax of £273,175, a 13 per cent rise compared with the same period of last year. It has won a string of awards, and government policy, which provides incentives for supporters of renewables, is moving in its direction.

Clearly, there are risks. Good Energy, with a market cap of around £3m, is a tiny player in the UK's electricity market. Its shares, traded on Plus Markets, are illiquid and often volatile. Still, this is a profitable company, with little in the way of debt, and it operates in a growth market. A takeover is always a possibility, and at 11 times earnings, the market is not overrating these prospects. Buy.

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