First the good news: CEO Samir Brikho has transformed Amec from a lame duck into one of Britain’s best-performing engineers. Underperforming divisions – construction, facilities management, property development and public /private partnerships – have been jettisoned. Amec now focuses on the expanding oil, gas, mining and nuclear industries. As a result profit margins have trebled.
The firm is a leading supplier of high-value consultancy, engineering and project-management services to the world’s natural resources, power, water, and environmental sectors. BP, Chevron, Shell, Sellafield, National Grid and EDF are among its biggest customers.
So why do I advise taking profits? Simply because, at current levels, the stock appears over-bought, having leapt 200% over the past two years. According to City estimates, the board will achieve 2010 sales and underlying earnings per share (EPS) of £2.9bn and 57.1p respectively, rising to £3.1bn and 63.4p in 2011. This comes on the back of rampant customer demand, a £3.1bn order book and oil at $80/barrel. So the stock trades on a lofty 19 times earnings, and pays a mean 1.7% yield.
Amec (LSE: AMEC), rated a BUY by Evolution Securities
I’d value Amec on a more conservative multiple of ten-times EBITA, assuming through-cycle margins of 8%. After adding back the £680m of net cash, I get an intrinsic worth of about £9 per share.
Further out, growth at its clients – all running at full tilt, thanks to surging energy and commodity prices – will eventually fade. That will deliver something of a hammering to engineering firms, just as it did in 2008/2009. Indeed, this “high noon” moment, could soon arrive, given that Beijing is actively cooling off China’s spiralling inflation. Yes, there is always a chance that Amec will fall prey to a takeover from the likes of, say, ABB. But at present levels I suspect most trade buyers would baulk at the price.
Lastly, shareholders need to be assured that adequate succession plans are in place, in the event of Mr Brikho leaving the group. Preliminary results are due out on 3 March.
Recommended SELL at 1,136p