Petrofac’s aim, in updating the market just before the end of the first half of its financial year, was to reassure that the Serious Fraud Office investigation announced a month ago was not, as feared, leading to a loss of new contract wins as nervous clients left the company off tender lists.
The reassurance only partly succeeded. There is not a lot that the company can say about the SFO inquiry into its links with Unaoil, which it has employed in Kazakhstan in the past, amid allegations of bribery and money laundering, and it could drag on for a while. Other UK oil service companes have also been dragged into the affair.
Unfortunately, Petrofac was required to accompany that reassurance over the pipeline of orders and the backlog with an admission of what the market had largely expected, that the Integrated Energy Services division would undershoot profits guidance. The range of expectations is now $60 million lower than suggested at the full-year figures in February.
IES has caused enough grief in the past. It was set up some years ago with great hopes, allowing Petrofac to take stakes in big projects it was working on and so share some of the profits. The idea never really worked out, while Petrofac also suffered from a disastrous contract in the North Sea, the Shetlands gas plant for the Laggan-Tormore field. The latest bad news is, predictably, the low oil price and a slow ramp-up of the Greater Stella Area in the North Sea. Meanwhile, migration of work off Mexico to the production-sharing contracts has taken longer than expected.
Petrofac decided at the full-year figures for 2016 to stop giving forward guidance on earnings. It is a measure of the company’s concern that it has reinstated them for the first half, a figure of $135 million to $145 million suggested, while accepting that the full-year numbers will depend on second-half performance. There is also concern over debt, up from $900 million at the end of 2016 to $1.1 billion, though this should come down in the second half.
On any measure Petrofac shares, off 8½p at 417½p, look cheap, selling on five times earnings and yielding 11 per cent if the dividend is maintained. Those prepared to take a speculative punt might as well do so.
MY ADVICE Buy
WHY This is a highly risky investment and the dividend could yet be cut, but the shares should rebound if there is no further bad news
Northgate
Given its status as a proxy for the British economy, it is as well that the problems that Northgate experienced in the second half of its financial year appear to be entirely down to the van hire company’s own failings. Northgate has been losing market share for three years, volumes falling 4 per cent in a market that has been growing by 4 per cent. It is behind with its digital set-up and management has been changed.
In previous years, it has been the Spanish operation that has let the company down, but the strengthening economy there and various projects allowed some recovery, even if profits were down a touch at constant currency rates because of several one-off factors.
In the UK, underlying profits fell by 21 per cent to £43.9 million amid a 6 per cent drop in the number of vans on hire in the second half. This has stabilised and the board reckons to have taken the necessary action while identifying future avenues to growth as customers shift away from ownership to term and contract hire.
The shares, which slumped 86p to 446p yesterday, sell on only ten times earnings, which looks like an attractive entry point.
MY ADVICE Buy
WHY Steps are being taken to improve the UK performance
BCA Marketplace
Some probably still think of BCA Marketplace in terms of its predecessor company, British Car Auctions, which did precisely that. BCA, which floated in summer 2015, reckons to deal with cars during their entire working life, from delivering 1.6 million new ones a year to dealers to acquiring used ones, often from company fleets, refurbishing them and selling them on again.
This may involve taking a “hammer fee”, or commission, or buying them outright, either through its Webuyanycar offshoot or from owners of those fleets. Last summer BCA bought Paragon Automotive, which refurbishes vehicles. The figures to April 2 are complicated by a switch to more fleet purchases, which increased revenues sharply, and by the costs of the float contained in the figures last time.
Adjusted earnings were ahead by almost 38 per cent to £135.6 million, of which about 30 per cent was organic growth, even if at the reported level pre-tax profits were up from a negligible £3.9 million to £56.4 million.
The Paragon purchase sent debt to £260.5 million at the financial year-end, from £170.7 million, but with cashflow running at almost £140 million for the year that figure should come down and there is up to £500 million of borrowings put in place to allow further purchases, possibly replicating the Paragon deal on the Continent.
The shares, which floated at 150p, added 4p to 199p. On almost 19 times earnings, though, they look fully priced.
MY ADVICE Avoid
WHY The earnings multiple looks full enough for now
And finally . . .
Tempus has been tipping Abcam for some years now. The Cambridge-based biotech provides essential research tools, in the form of antibodies, for pharmaceuticals companies and dominates its global market. Berenberg, the broker, has just initiated research with a price target of £11, which seems a little on the cautious side; the shares closed at 980½p last night having almost doubled over the past two years. The broker says that the earnings multiple of 30 for next financial year looks sustainable.
