Investment Column: Atkins shares are still underperforming

RPC Group; Imaginatik
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Our view: Hold for now

Share price: 557p (+18p)

The analysts at the Royal Bank of Scotland say WS Atkins shares look too cheap and they advise clients to fill their boots.

Sadly for RBS and, let it be said, for investors in the engineering consultancy, few seemed to heed the advice with the stock up just 3.3 per cent yesterday after the group issued a consensus-busting set of 2008 numbers.

For shareholders, Atkins's share price must be a huge cause of frustration. The company is undoubtedly doing well and announced a litany of good news yesterday: operating profits were up 19 per cent, with the operating margin jumping by 6.9 per cent. More than half its budgeted revenue for 2009 is already confirmed and, crucially for investors, the final dividend increased by 8 per cent. It gets better still: much of Atkins's work is driven by climate change regulations, which can only improve in the coming years, and the company expects healthy growth in the next 12 months. And still they do not buy.

The chief executive Keith Clarke says he is not bothered about the share price, and that the group's operational and financial performance will eventually be reflected in the stock, which is fine, but shareholders will eventually want to see some reward for their faith.

The watchers at RBS say that, with the stock trading at seven times enterprise value to net operating profit after tax, it is "at the bottom end of the consulting peer group".

We always like a cheap stock, but we would like some evidence that the shares are showing some signs of life before buying. Hold for now.

RPC Group

Our view: Buy

Share price: 170p (+5p)

Ron Marsh, the chief executive of the plastic container maker RPC, reckons the recession has "bottomed out" in Britain, words that will come as music to the ears of Gordon Brown and Alistair Darling.

The news, if true, will no doubt also be welcomed by RPC shareholders. The group said yesterday that its 2008 full-year loss was down to restructuring costs and that, as a result of stronger margins, reduced costs and defensive end markets (more than 50 per cent of its output is used by the food industry), 2010 would be another profitable year. As if to back the point with more than words, the group increased its dividend by 3 per cent.

There are some tricky bits to RPC's operations: while food packaging is its biggest business, it also works in some slightly more nervous sectors, and Mr Marsh concedes that success in several sectors this year is dependent on clients such as L'Oréal having good years.

We do rather like RPC, even if it is being hit the recession. Yes, nearly half of the company is exposed to less than defensive sectors, but with input and energy prices falling over the past 12 months, the group should come up against some undemanding comparisons later in the financial year.

The analysts at its house broker Cazenove argue the shares are cheap: "RPC trades on calendarised 2010 multiples of nine times price earnings (PER) and offers a yield of 5.5 per cent, which is a compelling valuation relative to the FTSE All-Share average of 12.3 times PER and 4.5 per cent yield." Add this to the dividend increase, and you've got yourself a deal. Buy.


Our view: Hold

Share price: 6.5p (+0.75p)

The management of Imaginatik are nothing if not ambitious. Within five years, the chief executive Mark Turrell reckons the group, which produces software that it claims allows large organisations to collect and analyse cost-saving ideas from employees, will be a leading and independent technology company. With its market capitalisation of just £7.6m it has a long way to go, but after announcing a maiden full-year operating profit yesterday, it is starting to make strides.

There were certainly impressive elements in the statement. The company can already rely on £3.3m of recurring revenues this year, and with no debt and plenty of cash on the balance sheet, it is in good financial shape. The fact that the company will increase its marketing spending this year, to press its case as a cost-saving investment for clients, and that it hopes to expand the uses of its software, is also welcome.

The problem, sadly, is Imaginatik's current size. The stock was up 13 per cent yesterday and even Mr Turrell agrees that the share price is news driven. Yes, we agree that there may well be good news to come over the next 12 months, but it could well be another year (assuming there is no bid to send the stock skywards) before the investors get a fillip as good as yesterday. As such, we would pause before buying. Hold.