Looking at its share price, it would appear that the wheels have come off this engineer. But that’s down to overselling folllowing a thwarted takeover, says Paul Hill.
Tip of the week: FKI (FKI), rated a BUY by Evolution Securities
Last week, FKI released an upbeat trading update ahead of first-half results due on 29 November. Turnover was up 7% on a constant currency basis and the group is “well positioned to improve its trading performance in the current year”. But looking at the share price, down some 30% in the past three months, one would have been forgiven for thinking the wheels had fallen off this engineer.
So what’s the reason for the City’s negative view? Unfortunately, FKI has become another innocent victim of the credit crunch. In May, it received a takeover bid from a private-equity house at around 130p a share. In August talks were terminated, due, I suspect, to the buyer being unable to fund the deal during the liquidity crisis. As a result the shares dived, with hedge funds and arbitrage traders bailing out, making the fall worse. The shares now look oversold, offering a good buying opportunity.
FKI operates four standalone units: Logistex, with sales of £373m, is involved in manufacturing materials, and handling and sorting equipment for postal, airport and e-commerce applications; Lifting Products (£434m) sells hoists, wire, rope and chains; Hardware (£180m) includes handles, hinges, locks, doors and ergonomic furniture; and Energy Technology (£344m) supplies turbogenerators, motors, transformers and switchgear for power applications.
Following a strategic review in June, the board said it would concentrate on its Lifting Products and Energy Technology units and dispose in time of its non-core Logistex and Hardware units. Hardware has suffered as housing starts fall in North America, while Logistex is a growth engine in its own right, requiring separate management skills. So from a breakup perspective, how much is FKI worth? I would value the fast-growing Lifting Products and Energy Technology units on ten times 2007/2008 operating profits, or about £1bn. These businesses are benefiting from the buoyant oil, gas and mining sectors.
Hardware should fetch around £150m, while Logistex, which has recently won a $190m order from the New Doha International Airport, should realise upwards of £250m. The combined enterprise value on a sum-of-the-parts basis for the group is around £1.4bn. After stripping out net debt of £330m, a £109m pension deficit and restructuring costs of £60m, that’s a market capitalisation of about £900m, or 150p a share. The City expects adjusted earnings per share for this year and next to be 10.0p and 11.2p, putting the stock on corresponding p/e ratings of only 9.3 and 8.3. The dividend yield is a chunky 4.8%.
Fine, but what are the risks? If the US housing market becomes uglier, or there is a global recession, this could derail the disposal plans. Also, debt levels – with interest cover of 3.7 – need to be reduced, while dollar weakness, contract delays and cost inflation are putting pressure on margins. But if you’re prepared to accept some volatility and have a medium- to long-term outlook, the shares are good value for more adventurous investors.
Recommendation: BUY at 95p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments