This week’s gamble seems a much cheaper play on the booming energy sector.
Mount Engineering (Aim:MOU)
Floated on Aim in July 2007 at 70p, the group owns three subsidiaries (Redapt, Raxton and Hi-Flow). Redapt and Raxton produce high-performance thread components that are used to insulate and protect wiring in places such as as oil refineries, where a stray spark from an electrical connection could prove explosive. Hi-Flow distributes industrial valves and actuators to the oil and gas, petrochemical and process industries. All three companies are well-established brands within their niches.
The end-user for all three is the oil and gas industry (generating about 80% of sales) – although Mount also serves a wide range of other customers, including mining, waste water and pharmaceutical businesses.
Blue Oar Securities (house broker) expects 8% a year top-line growth for the foreseeable future. Sales and underlying earnings per share for 2008 are expected to be £11.8m and 8.6p respectively, giving a 2.4p dividend (or 3% yield) and a break-even cash position at the end of the year (net debt was £1.1m in March). The stock trades on forward p/e ratios of 10.7 and 9.2 and seems much better value than most of its peers.
Mount’s prospects also look secure. If the crude oil price fell from $130 a barrel, the directors believe prices above $50 would be enough to maintain a healthy performance for the next 12 months, supported by the construction of new oil rigs, and the resumption of mothballed projects made viable again. But what are the dangers?
Rising metals prices have led to higher raw material costs, which it has so far been able to pass on. Also Hi-Flow has recently experienced delays in some large orders. But underlying demand is robust; this temporary bottleneck should resolve itself. Lastly, as a small fish in a large pond, Mount could get squeezed by its bigger rivals. All the same, Mount is a solid business in attractive niches and is well placed to sail through any global slowdown.
Recommendation: SPECULATIVE BUY at 76p (market cap. £18.6m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments