Questor share tip: Hold Atkins after solid start

The Epsom-based engineer provides design services in rail, roads, energy and other industrial sectors and is benefiting from a resurgence in UK infrastructure spending.

Atkins’s UK division is responsible for half of the group’s revenue and 45pc of its profits. George Osborne, the Chancellor, has put infrastructure spending firmly back on the agenda in the UK to boost the economy.

The company said the UK continues to see growth in road, rail, and water work. In particular, the road design business is enjoying a “buoyant market” according to management and the rail division reported “high volumes of work”.

However, management warned that the profit performance was impacted by changes to the scope of work.

The engineer said it has got off to a strong start in the Middle East as the region benefits from increased infrastructure spending and a recovery in the property market.

WS Atkins has been appointed as lead designer on the Doha gold line metro in Qatar. The total project cost is £2.5bn and Atkins will generate fees of about £80m during the next two years on the project.

The North American business was restructured last year and the company said it expects to see the fruits of its labours this year, with improved profit margins at the half year stage ended September.

Asia Pacific is trading well, having won work on the new Qindao airport in China’s Shandong province at the end of last year.

The engineering group is still generating plenty of cash and ended June with £165m on the balance sheet. The FTSE 250-listed civil engineering contractor reported net cash £40m higher than analyst expectations at the end of March.

The engineering group is focusing on becoming a more profitable business despite revenues remaining fairly flat. The low margin UK highways construction and maintenance division has been sold to Skanska and the group is targeting profit margins rising to 8pc during the next two years, from 6.5pc at the end of March. That means the company doesn’t have to deliver huge revenue growth to improve profits and returns to shareholders.

Atkins made significant progress in its higher growth energy division by announcing it was preferred bidder on the Sellafield decommissioning project and design demand in the oil and gas sector remains solid.

The one-in-three-year pension valuation reported a deficit of £430m. While this increases risks for investors, crucially it won’t affect returns, as the deficit repayments have been frozen at £32m for the next decade.

Questor downgraded the shares (£14.16, Hold, April 10) as much of the good news was in the price. The shares are off 8pc since then. The company has a strong balance sheet with a prospective dividend yielding 2.8pc that is covered more than twice by spare cashflow. The shares are trading on a forward price-earnings ratio of 14 times, falling to 12.8 times next year and that looks fair.

Atkins is a high-quality company and Questor retains that advice, hold.

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