Sweett worth double after slump

Sweett blamed "challenges" in overseas markets for the latest profits warning to rock the London market. Shares in the construction and property consultancy plunged by a third on Thursday after a review by the new chairman uncovered problems. The UK business, however, is doing well, and some experts think the shares are now severely undervalued.

John Dodds took the chairman's seat less than three months ago and wasted no time in undertaking a thorough review of the business. "The board now expects that the group's results for the year ending 31 March 2015 will be materially below market expectations," said Sweett ahead of interim results on 2 December.

Most of the problems are in Asia Pacific, and also in the Middle East where Sweett is reducing exposure. Winning business with China with Alibaba was offset by disappointment in Hong Kong, and the company warns of a likely write-down in Australia unless things pick up in the second half.

However, Sweett does over half its business in the UK where the firm has made "good progress." It's won work with Jaguar Land Rover, the BBC and schemes at both Manchester and Liverpool universities. A series of infrastructure appointments with HS2 and Battersea Power Station have also been secured, and the order book remains at about £107 million.

Of course, analysts have slashed forecasts. Westhouse Securities cuts estimates for adjusted pre-tax profit from £4.3 million to £3.1 million, giving adjusted earnings per share (EPS) of 3.6p (down from 4.9p previously). In 2016, the broker expects £3.5 million and 4p respectively.

At 26p to buy, the shares trade on just 7.2 times current year earnings, dropping to 6.5 for 2016. That looks incredibly cheap, but clearly there's more bad news being priced in. Perhaps too much, according to Westhouse:

While there are still some uncertainties ahead of the interim results being reported we believe that the business will start to prosper under John Dodds, the new chairman since August 2014, and have moved our target price to 50p, equating to a 12.5x FY2016 P/E, (from 80p) but maintain our Buy rating.

"I am looking forward to taking the business forward with a greater focus on profitability and cashflow," says Dodds. That's good to know, and we expect to hear more about how Sweett will resolve its overseas issues next month. An independent investigation into bribery allegations made by the Wall Street Journal in 2013 is also nearing completion. Upcoming half-year results will include a material exceptional charge to reflect the costs of the investigation so far.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.