A contrarian share with a contrarian price, in a highly contrarian sector – but without the contrarian performance to match so far.
It's not a good time to be an engineer for big building projects. An easy way to save money for the private and public sector alike is to put plans on ice for the time being. Then there's the risk that the easy credit and easy optimism that fuelled ambitious building works in the recent past will see companies built on sand going to the wall and being unable to pay back debts.
It seems to be a combination of these factors that has held back the value of Scott Wilson Group (LSE: SWG) an international design and engineering consultancy which has 80 offices worldwide and employs around 6,000 people. The company works on interesting projects from Scottish rail links to container terminals in West Africa.
Like many others, the share price has rallied a little since mid March, but it's still a fraction of its former value -- having gone over 337p two years ago. Today it stands at just 57p, valuing the company at less than £42m.
Scott Wilson first came to the market in March 2006, though the cynical among us may think that was to help fund the pension deficit. And it seems to be weathering the economic storm reasonably well so far, unlike its share price.
Mixed news
The most recent hard news from Scott Wilson came with the pre-close statement last month which was a bit of a mixed bag. Overall, underlying operating profits for the year ending 3rd May (pre-exceptionals) are expected to be broadly in line with the previous financial year (which showed an operating profit of £19.1m). For the market to value the company at a little over twice operating profit, there must be something wrong.
And sure enough, at the time of the interim management statement in March, the company spoke of a rapidly deteriorating global economic environment, the deferral of projects and postponement or curtailment of existing work-in-progress. Though this can hardly have been a huge surprise, the news kicked the share price when it was already down, sending it below 40p. But on the upside, we also heard that the company's road and rail businesses in the UK, together with the majority of its international operations, particularly in China, India and Eastern Europe, continue to see high levels of demand. Also, the order book has continued to grow and now stands at record levels.
Overall, the company was unsure about the future and was taking steps to reduce costs and staff numbers as it struggles to match capacity with its workload. Crucially, it also hinted at the possibility of debts not being paid for work in progress -- which will result in an exceptional charge of £4-6 million this financial year.
Scott Wilson's net debt at the end of February was £29.5m against committed banking facilities of £70m, repayable in April 2011. This is vital of course as it's a shortage of cash that can send companies with otherwise healthy balance sheets and order books to the wall. The interim results to 26 October showed a net tangible asset value of over £173m, with trade and other receivables a whopping £134.5m. Shareholders had better hope that not too many debtors go belly-up.
Low rating
The brokers have consensus forecasts of 15.2p earnings per share for 2010, placing the shares on a forward price-to-earnings ratio (PER) of 3.8. It looks like the market thinks Scott Wilson won't be able to collect on some of the boom-bust debts. But the directors spent £34k on shares at around 93p in January which is a comfort. A return to that sort of level would reward investors buying today with a better than 60% return.
I'll be having a close look at the finals on 30 June before deciding whether to buy. There's certainly a lot of bad new news already priced in to today’s valuation. Patient investors who think the company will go on from here could be handsomely rewarded given sufficient time.
More from David Holding:
