After forking out £96m on two acquisitions last year, Mouchel has successfully diversified away from its roots in road maintenance, and is now a multi-disciplined engineering consultant and outsourcing specialist
Mouchel (MCHL)
For the year ending July, organic growth was a healthy 14%, with 33% of its £657m turnover coming from highways (eg Transport for London), 26% from regulated industries (eg Thames Water) and 41% from government outsourcing (eg for Lincolnshire County Council, the police, NHS and building for schools programme). Chief executive Richard Cuthbert bullishly commented afterwards that “all of our clients want to reduce costs and improve services, and the pressure to do this is becoming greater in the current environment. We have been relatively untouched by the turmoil in financial markets.”
An area that seems to have spooked investors is that Mouchel missed out on the multi-billion pound M25 widening contract and also did not secure another large Highways Agency deal. Yet future prospects are underpinned by a chunky £2.1bn order book and a bidding pipeline of £2.2bn. And looking ahead, the board believes that organic growth of 10-15% a year is sustainable and EBIT margins can be lifted from 6.4% currently to 8.0%.
Another City concern is the prospect of weakening public expenditure. Here Mouchel’s focus on the maintenance of existing infrastructure – rather than new-build projects – should serve it well. So, too, should cost pressures on local authorities, which will increase the momentum behind outsourcing back office functions to the private sector. Its water industry operations should also prove resilient, while Mouchel could also receive a lift from Chancellor Alistair Darling’s plans to bring forward billions of pounds of public spending on new schools and hospitals to help the UK economy (see page 6). The Square Mile expects 2008/9 turnover and adjusted EPS of £747m and 31.0p respectively, rising to £805m and 34.5p in 2009/10. As such, the 35% fall in the shares over the past six months seems harsh, especially since the stock trades on a generous ten times earnings and pays a 2.4% dividend yield.
The balance sheet appears secure as well, although investors should carefully watch Mouchel’s £81.9m net debt together with its £34.6m pension fund deficit. That said, assuming the Group can reignite its top line growth by landing its fair share of new outsourcing contracts, then the City’s sentiment towards the firm should pick up again quite quickly.
Recommendation: LONG TERM BUY at 312.75p (market cap £351m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.