Investments: Amec proves there's life out there if you know where to look for it
Tuesday 18 October 2011
OUR VIEW: BUY
SHARE PRICE: 876P (+15P)
Amec, the energy services company, yesterday showed that while the corporate sector as a whole might be raising its drawbridges amid the very real prospect of a double dip recession, there is still life out there for investors. It has been appointed by BP to deliver engineering and project management services for the main platform design for Clair Ridge, the second phase of the giant Clair oil field, west of Shetland.
Yes, that's in the North Sea. But contrary to popular belief, as a source of oil the North Sea is anything but dried up. There's plenty of the black stuff still to be found. The work, already under way, is worth £150m, and follows the company's completion of an earlier phase. It's the sort of contract that underlines the strength of the business: wherever energy companies are to be found, Amec will be there, picking up work.
What's more, the company has a £500m cash pile, which is slated for acquisitions. A blockbuster transformative deal hasn't been ruled out and Amec's balance sheet is strong enough for one, although it's not what we would prefer from an investment perspective. That said, if nothing turns up, Amec has commendably pledged to give the money back to investors.
With good businesses in the renewables and nuclear spheres, not to mention a healthy environmental consulting arm, Amec is in decent shape as it showed with its recent interim results. Management wants to expand into mining and parts of the oil business where Amec is weak. That looks sensible.
Some parts of the company's operations make us a little queasy – it does a lot in oil sands, for example – but the job of this column is to weigh an investment case, not a moral one. From that perspective Amec is solid.
While the company will not be helped by oil price volatility if oil companies respond by delaying projects, at about 13.5 times 2011 forecast earnings, with a prospective yield of 3.5 per cent, the shares are by no means expensive compared with peers and given Amec's long-term prospects and quality.
We said buy at 891.5p last August. The shares are down on that, but in an energy hungry world, this is about as close to a safe bet as you get in today's markets.
Low & Bonar
OUR VIEW: HOLD
SHARE PRICE: 48.5P (-3.25P)
Flooring specialist Low & Bonar was making confident noises yesterday, despite the troubled economic outlook. And the group can make a case for optimism.
L&B said that overall demand for key products remains "robust". Its civil engineering and flooring businesses are doing well. Building and industrial materials – to no great surprise – are subdued, while sales of grass yarn (8 per cent of revenues) have fallen. But the latter operation is being restructured and should at least break even.
What's more, the prices of L&B's raw material polymers have finally stabilised, albeit at a high level. What this means is that the company (which has been able to pass on some price increases) ought to be able to improve its operating margins from 6.5 per cent in the first half. It's also worth noting that the company felt confident enough to increase its dividend at interim stage.
Still, that's the here and now. The future is less certain. While its chief executive Steve Good said he was alert to the potential impact of economic difficulties, he's still confident of delivering "another year of substantial progress". We are more sceptical and fear sales volumes could slow.
However, even with analysts downgrading their forecasts on those fears, the shares still trade on only just above 8.5 times full-year expected earnings with a solid prospective yield of 4.3 per cent. Debt has been edging up, but is expected to fall over the next few years. The company seems to have been well run recently, so we'd hold for now.
OUR VIEW: BUY
SHARE PRICE: 42.5P (-8P)
Why would any investor look at a tiddler which lost £3.2m for the year to July 2011 – more than twice its loss for the previous year – with revenue slipping (£2.6m against £2.9m) and a product you'd need a physics degree to really understand?
Because that product could prove to be very special and, given this country's lamentable record at capitalising on home-grown tech, we think that once it starts to motor Nanoco will get gobbled up by an overseas predator at a tidy profit for investors.
Its quantum dots have myriad potential applications, but the most commercially exciting now are in television backlighting – they offer better colour quality and brightness than white LEDs and use less power. They're also free from cadmium (a nasty pollutant).
The losses were incurred creating manufacturing facilities in Runcorn, Cheshire, although these were completed on time and on budget. The product also continues to attract interest from big electronics companies. All that and £17m cash on the balance sheet. Yes, we tipped at 95.5p. So at yesterday's price, it's a steal.
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