Investment Column: The market is being too harsh on Atkins

Hellenic Carriers; Waterlogic

Nikhil Kumar
Tuesday 13 September 2011 00:00


Our view: buy

Share price: 532p (-18p)

The last time we looked at WS Atkins, we decided to buy, reasoning that the combination of what was a thin valuation and the engineering group's sensible strategy of expanding its reach in the energy sector augured well.

Since then, however, markets have suffered a well-document slump as investors factored in the prospect of another slowdown in global growth.

This reversal has hit companies of all shapes and sizes – and Atkins has not been spared. The group's share price has, we are sorry to say, fallen back since our recommendation earlier this year. So, given this reversal, is it time to cut our losses?

To begin with, the business remains on an even keel. The update that was published alongside last week's annual meeting confirmed that "the earnings performance for the six months to 30 September ... is anticipated to be in line with our expectations".

That said, there were signs of weakness. While reassuring the market on earnings, the update also revealed that, over in North America, the company's Peter Brown construction business had had "poor start to the year". To be fair, this had been noted in the past. But it did show that economic trends were turning sour.

Offsetting this and the difficult conditions in the UK was the Middle Eastern arm, where the workload "has increased during the year to date as investment continues in the growing infrastructure market".

One of the key points for us was the increase in the overall group headcount in the year to date, as "growth in ... [the company's] Middle East and Energy businesses" exceeded reductions in the UK.

This diversity and international reach means that Atkins is better placed to deal with any downturn than many other companies. Adding to this, there is the valuation, which has become thinner still.

In fact, Atkins trades on around 7 times forward earnings. All the while, it yields well over 5 per cent. We see no reason to cut and run.

Hellenic Carriers

Our view: sell

Share price: 46p (-0.5p)

When looking around for investment opportunities, Greece would hardly be the first stop in the current climate. And while it may be Jersey-based and listed in London, there's no doubt where Hellenic Carriers' roots lie.

The company is linked to Mantinia Shipping, which was founded in 1971 by the Greek shipping magnate Konstantinos Diamantis, and was built on his relationships with international and domestic oil companies.

Today it operates a fleet of five vessels that transports dry bulk goods including iron ore, coal, grain and steel products around the world. The sector, however, has come under severe pressure during the downturn and Hellenic's first half numbers reflected that yesterday.

The AIM-listed group saw revenues fall from $30.6m in the first half of 2010 to $20.8m a year later. Net profits sank from $10m to $3.1m. The company blamed the "considerable downward pressure" on the dry bulk market this year, which is also feeling the effects of an oversupply of vessels which were ordered during the boom years.

Yet the management believes there are glimmers of hope, most importantly the growing demand from the East, and it will recover when the current crisis eventually lifts.

House-broker Panmure said the results were exactly as expected and believes there is a buying opportunity. With the low charter rates and the new capacity set to enter the market, it seems far too risky for us, however.


Our view: hold

Share price: 175p (+3.5p)

Waterlogic made its debut on Aim in July. The company makes water dispensers that do away with the need for plastic tanks; instead, its machines connect to the mains supply, delivering clean water on tap, so to speak.

Yesterday's interim results showed that the business is also looking healthy. Revenues were up by almost one third, while the company forged new relationships in new markets, "including orders received from Mexico, Saudi Arabia and Turkey".

All this is positive, and argues against selling. The problem, however, is that the market is very much alive to the opportunity. Despite volatile movements elsewhere, Waterlogic has done well since its float, trading on multiples of over 35 times forward earnings, according to Nomura Code. This argues against buying.

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