Petrofac
Order intake this year $4.7bn
There was much relief in a nervous market that Petrofac did not serve up too much more bad news with its halfway trading update. There was also a recognition that the oil services company appears to be past the worst and can be expected to start to grow again.
Petrofac’s troubles have come in threes — aside, that is, from the inevitable fallout from the low oil price. Specifically, three contracts have gone horribly wrong.
Two were within its overambitious Integrated Energy Services division, which was intended to take direct stakes in projects. One is a field in Romania now being exited; the other is the delayed Greater Stella in the North Sea, which is still heading for first production next year and which will be the subject of negotiations with its partner, Ithaca.
The third falls within the core engineering division and is said to be the first lump-sum project in the company’s history to have gone wrong. And how wrong! Another £30 million of extra costs at the Laggan-Tormore gas plant in the Shetlands is offset by £20 million of tax savings, but on the best-case scenario the project will have run up losses of $450 million on completion.
On the positive side, the backlog of orders is piling up because Petrofac is heavily involved in areas such as the Middle East onshore, where investment is continuing. Analysts believe that, should other work where Petrofac is well placed come through, that backlog could hit $23 billion.
The question for investors is what this means for dividends, because the 4.5 per cent yield at least offers some support. If it is maintained this year, it will barely be covered by earnings. My betting would be that it will not be cut, but this requires no more bad news out there.
Some pressure could come off if asset sales in Mexico are achieved, as part of the government’s reform of the energy industry to allow more overseas players in. This could raise as much as $400 million, although probably not all this year.
The shares, up 53½p at 923p, offer a dilemma. They sell for less than ten times 2016 earnings, which looks cheap. I would be inclined to buy, while keeping my fingers well crossed.
My advice Buy
Why Though any purchase today would be highly speculative, if all the bad news is out of the way, then future workload looks strong
Chemring
Revenue £162m Dividend 2.4p
Michael Flowers, the chief executive of Chemring, describes the first half for the defence equipment manufacturer as “frustrating”. The progress that was made, and the winning of some important strategic contracts with the US defence department, was not reflected in the numbers.
Instead, delays to some Middle East contracts sent revenues and profits at the group’s sensors and electronics division sharply into reverse. In addition, there were technical problems on one big air contract and even difficulties in shipping dangerous goods overseas.
This pushed the company into a £1.3 million pre-tax loss in the half to the end of April and means that the annual performance will be even more heavily weighted to the second half. The order book is up by £100 million to more than £500 million, with another £50 million won since. Those American contracts will feed through to profits in the next couple of years.
Over that timescale, Chemring is in a very good place, with defence spending starting to move forward again. The shares, up 7½p at 213p, sell on 14 times this year’s earnings, but that multiple declines sharply next year.
My advice Buy long term
Why Company should be at the nadir of its fortunes
Telecom Plus
Revenue £729m Dividends 40p
One of the unacknowledged losers from low energy prices has been Telecom Plus, which makes its money reselling services such as electricity, gas and telecoms through its Utilities Warehouse brand at keen prices to its growing customer base.
The company says that low prices have tempted in small rival operators to offer cheap start-up contracts that are unsustainable should prices start to rise again, which one day they will. For now, it refuses to offer new customers better deals than those enjoyed by existing ones. The company is hoping to benefit from future regulatory action that will stabilise the market, although this is not to be relied on.
The consequence is that the sharp rate of growth in new customers seen in earlier years has slackened. That growth was 10 per cent to more than 580,000 in the year to the end of March. Telecom Plus hopes to get to a million households, but is making no promises when.
In addition, the company took an £11 million writedown in April because of the amount of gas going into the system but not being paid for.
Those new customers coming through still allowed annual profits before tax to rise by 22.5 per cent to £52.2 million. The full-year dividend is up 14 per cent, which suggests a forward yield of 5.5 per cent on the shares, up 29p at 850p.
They sell on 15 times earnings. The long-term business model is intact and growth will pick up again, but it is impossible to say when and there seem no obvious immediate catalysts for buying now.
My advice Avoid for now
Why Low energy prices mean markets remain challenging
And finally . . .
A useful contract win for Interserve, which has been chosen as preferred bidder for the new £200 million Defence and National Rehabilitation Centre at Stanford Hall, near Loughborough, where injured servicemen and women will be treated. It comes after a successful capital markets day for the company last week, at which it spelt out the sources of future growth, such as supplying frontline services to the public sector, the Initial Facilities purchase and investment in the Middle East.
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