Atkins is the UK’s largest designer of civil engineering projects, employing around 17,000 staff on projects such as water defences, railways and schools. It has seen double-digit earnings growth over the past two years.
Yet its shares have been hammered by the sell-off, even though expectations for the company are not that poor. In fact, analysts expect sales for the year ending March 2010 to come in at £1.4bn, with underlying earnings per share of 65.6p. And this is at what is predicted to be the low point of the recession.
What’s more, the 25p dividend is covered 2.6 times, and underpinned by £225m net cash. So at £5.47, the shares trade on an attractive bottom-of-the-cycle p/e of 8.7 and pay a 4.6% yield.
Atkins (LSE: ATK), tipped as a BUY by KBC Peel Hunt
So what’s spooking the City? Although about 80% of its revenues come from the £10.3bn UK market, Atkins also operates in riskier territories such as China and the Middle East, which has been hurt by the property crash in Dubai. In April, Atkins said that cash collection had deteriorated in the Emirates, with £25m in trade debts overdue.
There was no sign yet that these payments would turn bad, but my guess is that a chunk (say 30%) will need to be written-off. But if this occurs without unduly impacting the order book, it looks like a storm in a teacup, since the Middle East only represents 12% of total revenues. And the chief executive, Keith Clarke, also thinks these difficulties are “relatively short-term liquidity issues” rather than a more protracted problem.
Another threat is intensifying competition from rivals such as Mott MacDonald, WSP, and Mouchel, within both the weak commercial property sector and Atkins’ core public/regulated markets (70% of turnover). But in the UK, Atkins is more than 50% bigger than its closest rival, and is the lead consultant on the London 2012 Olympics, which should help win the firm follow-on orders. Atkins will also benefit from the government bringing forward its £3bn infrastructure programme to stimulate the economy.
Finally, there’s the £215m pension deficit. But while this is something to watch, it was calculated at the end of March, when the FTSE 100 was still below 4,000. If this proves to be the nadir, then the gap should unwind without straining cash flow too much. I suspect Atkins will come through this temporary pain in a much stronger position. Preliminary results are due out on 17 June.
Recommendation: long-term BUY at £5.47
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments