Shares in UK engineers have taken a hammering over the past six months due to concerns over a deteriorating economic outlook. But this particular stock is looking oversold.
Cookson Group (CKSN)
Cookson, a leading materials technology company, is one such victim, with its shares slumping nearly 30% since reaching a high of 889p back in October. This presents a buying opportunity for the more adventurous investor. Let me explain.
Although confidence has clearly fallen, the International Monetary Fund is still forecasting global GDP growth of 4.1% in 2008 (from 4.9% in 2007). Yes the retail, banking and property sectors have crashed, but capital investment is expected to remain relatively buoyant, due to strong growth in the oil/gas, commodity and power generation sectors, and in emerging markets.
Cookson supplies all of these sectors and is presently beefing up its presence by buying rival Foseco in a £497m deal that is set to be approved by competition regulators in March. The acquisition looks good, as it cements Cookson’s position as the world’s leader in the supply of fireproof linings and other products to the steel and foundry industries. Annual cost savings of £18m a year have been identified, while there should also be decent, although as yet unquantified, cross-selling opportunities.
Funding for the acquisition has already been secured, with the establishment of a new £950m credit facility on top of a £153m placing at 825p per share – both significant achievements when bank lending is tight. As a result, assuming that the transaction goes ahead as planned on 4 April, then I expect the combined group to achieve proforma sales and underlying earnings per share of £2.1bn and 62p respectively once the synergies kick in, putting the shares on an underlying 2009 p/e ratio of less than ten.
Additionally, the board updated the City on trading in December, and commented that “our end-markets are showing good growth and the outlook for steel production remains robust.” As always, though, there are a few grey areas to consider. The integration of Foseco will increase risk, albeit the businesses are complementary. Then there is the proforma net debt of around £700m, along with a £156m pension deficit. Finally, as with most industrial companies operating worldwide, Cookson is dependent on the health of the economy, whilst also being exposed to foreign currency fluctuations and rising input costs.
Nonetheless, given Cookson’s international footprint in rapidly-expanding emerging regions, I think the stock is a long-term buy. Full-year results are out on 11 March.
Recommendation: SPECULATIVE BUY at 631.5p (mkt cap £1.3bn)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments