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Stephen Rawlinson
15 June 2017 · 2 min read

Market Commentary - Housing, Infrastructure, Construction and Services 15th June 2017

Atkins has produced its final results this morning and abandoned the usual meeting in favour of a webcast. While the overall results are very positive the geographic split shows an exaggerated development of the trends seen for the last five years. Balfour Beatty has quietly risen in the last few days and we suspect will provide encouraging results at the interim stage.

Atkins has produced its final results this morning and abandoned the usual meeting in favour of a webcast. The recommended offer from SNC Lavalin is proceeding so the usual event is probably unnecessary. The numbers show why SNC Lavalin is interested. Revenue rose to £2.1bn from £1.9bn in the year to and March 2017, boosted by organic growth, FX and acquisitions; revenue grew by 4.3% at CER. Underlying operating profit was up 16% to £172m providing an operating margin of 8.2%, versus 8.0% in the prior year. Average staff numbers remained static. Net debt fell from £192m (post the PT&T acquisition) to a net cash position at the year-end of £6.1m. The pension deficit fell slightly to £259m from £286m following the latest triennial review as the longevity assumptions were changed (reducing life expectancy) and the rate of increase in salaries of scheme members were reduced. There are other moving parts as well but the outcome is the continuation of the c £35m pa shortfall recovery plan. We have looked at the pension issue for read across.

While the overall results are very positive the geographic split shows an exaggerated development of the trends seen for the last five years. The UK and the North American operations performed very well, Asia Pacific was OK but dull and the Middle East in poor shape. The UK operations saw revenue fall by 3% to £911m but operating profit rose 23% to £90m as cost efficiencies kicked in; revenue fell due mainly to reduced rail signalling work. In the North America operations revenue rose 33% to £481m and operating profit increased by 64% to £34m; revenue rose by 14% at CER.  The Middle East was in line with expectations but a 7% fall in revenue to £232m and a 26% fall in operating profit to £22m; this out-turn has interesting read across to other and explains the reduced level of interest from contractors. Atkins also points to cash collection issues which have been a constant theme. The Asia Pac operation saw revenue rise by 11% to £118m and operating profit rose by 9% to £9m; project delays affected the performance. The Energy division speedboat saw revenue rise by 62% due mainly to the PT&T acquisition which chipped in with revenue of £143m implying that the performance elsewhere was down, but we are told has now stabilised with a good 2H. So overall Atkins with the read across to others shows some interesting patterns that are not a surprise but emphasise findings of others.

The main moves yesterday saw Capita rise further 3% to 653p; we believe that a strong move in CPI is premature but on a 2/3 year view there is no reason why, given the underlying business potential the price cannot get back towards 1000p. The real issues are the appointment of the new top team and the extent to which the company can adapt to new technology that will transform back office operations. Balfour Beatty has quietly risen in the last few days and we suspect will provide encouraging results at the interim stage. It increased 2.7% yesterday to close at 286p; it is still cheap at this level on a 2/3 year view given the PPP/PFI portfolio. Compare the price of BBY with the Infra Cos’ the latter have risen substantially in recent months but BBY has not. The implication therefore is that BBY’s contracting operations are less valuable which is not the case; they have improved as has the net debt/cash position. The Infrastructure investments in BBY will remain undervalued as long as they are not separately quoted.

The main loser yesterday were few and bottom of the pile was Berendsen, down 1.3% to 1194p which will be affected by FX (as part of the Elis consideration is in € denominated shares) and there is still some execution risk. The other fallers were down just on ebb and flow of trading.

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