The Canadian bidder for WS Atkins has done its investors a favour in underlining the attractions of the company after an analysts’ presentation only last week that tried to highlight the prospects for growth, particularly in UK infastructure.
Atkins has been focusing on enhancing margins across its business, reaching 8 per cent, but revenue growth has been sluggish and while the British mega-projects are firm enough, there must be the inevitable doubts over any Trump spending.
That revenue will come in a bit above £2 billion for the financial year to March 31 that’s just ended and for the next two. The share price, until the possible bid from SNC-Lavalin apparently was leaked this week, was not that much different from the level at which it ended in 2013. Meanwhile, there has been some concern over its pension deficit, about £330 million at the interim stage.
The Canadians certainly look determined. They have lined up CDPQ, the Quebec pension fund, to provide about half the £2.1 billion finances needed for the bid, with the loan element secured against the cashflow of road projects in Canada.
If it succeeds, the offer, at £20.80 a share, will represent a punchy multiple of more than 17 times earnings for the year just gone. SNCL has been prepared to bid high in the past to get what it wants, paying a multiple of 16 times earnings in cash for Kentz in 2014 and indicating a dislike then of bidding wars. So it is paying a 42 per cent premium to the average share price over the past three months.
Atkins’ recent trading statement showed that while the UK, Europe and North America were moving ahead strongly, the Middle East, where operating profits were down by 42 per cent at the halfway stage, was being hurt by the low oil price and a consequent unwillingness by clients to spend.
The engineering consultancy sector has been consolidating, with companies such as WSP, Hyder and Scott Wilson being taken over. Someone could come in for Atkins, but the share price, up another 21p at £19.71, is a pound shy of that putative offer price and this looks implausible.
Nervous investors could sell in the market and take profits, but others should hold for a firm offer.
My advice Hold
Why The chances of a counterbidder look slim, but shares are still below the indicated offer for what looks like a successful takeover
Sophos
For a company that is almost impossible to value on any rational measure, Sophos has done remarkably well on the stock market. The cybersecurity software specialist listed in June 2015 and was valued at £1 billion, which looked chunky at the time. After a trading update that indicated analysts had underestimated its performance for the year to March 31 and a rise in the share price of 30½p to 302¾p, the company is worth about £1.4 billion.
Earnings forecasts for that year cover a wide territory. Billings at constant currencies in the fourth quarter came in 27 per cent ahead, with a rise of 20 per cent for the year. In addition cashflow and earnings will be ahead of consensus. Sophos has not clinched any unusually large contacts, while its focus on smaller and medium-sized business customers suggests a reliable enough income flow.
This year’s earnings at least put the shares on a more meaningful multiple of about 40 times earnings and there is even an insignificant dividend. The company is set to improve annual revenues, but those shareholders in since the float might consider taking some profits.
My advice Take profits
Why Shares are hard to value and have come up a long way
Topps Tiles
It was always going to be difficult for Topps Tiles to beat the comparable figures last spring, when there was an upsurge in housing transactions as buyers rushed to get in ahead of the changes in stamp duty. This fed into an even stronger performance for Topps in April and May as those new owners upgraded their kitchens and bathrooms.
The trading update therefore noted a 4.1 per cent decline in like-for-like sales in the second quarter to April 1 against the previous year and a 1.9 per cent fall for the first half. Of course, as that stamp duty effect waned, there was also a fall after the referendum in consumer confidence.
The good news is that, challenging though that second quarter was, there was a clear strengthening of the market as it went on as consumers started spending again on home improvements. Topps says it is confident that cost savings, such as on staff bonuses, will ensure it hits the market’s expectations for the year.
It is the market leader, with about a third of the domestic trade, and has opportunities to expand into commercial building, while adding about 15 stores a year until the middle of the next decade.
The company is also being more generous in its dividend payments, reducing cover to about twice earnings, giving a yield of more than 4 per cent. Still, the shares fell 7½p to 89¾p. They sell on just short of ten times earnings but, with comparisons becoming more difficult year on year, it could take the market a while to come around again.
My advice Avoid
Why Trading is facing strong comparatives
And finally . . .
Through no fault of its own, ITE Group finds itself working in some of the more difficult territories in which to stage exhibitions. Plainly, Moscow is one and Turkey another, while the economic disruption in India has led to some events there being cancelled. There is a business and strategy review that will report with the interim figures in May, but the latest trading update says there are signs of improvement in Moscow, even if Turkey remains tough. Almost all this year’s expected revenues are already booked.
