Interactive Investor

Amec profits hit the skids

26th March 2015 14:26

Lee Wild from interactive investor

"Messy" is the adjective most commonly used to describe Amec Foster Wheeler's (AMFW) first results since Amec bought the Switzerland-registered firm last year. The figures only include seven weeks of Foster Wheeler, but after spending $3.2 billion in cash and shares on the business, management are under pressure to make it work, especially given exposure to the battered oil industry is making life hard.

Sales edged up to almost £4 billion in 2014, but pre-tax profit tumbled by 39% to £155 million and cash flow from operations fell by a third to £200 million. Diluted earnings per share dropped 44% to 35.1p. Although the group has warned that margins are expected to be weaker this financial year due to customer pricing pressures and cost saving plans, the dividend rises by 3% to 43.3p.

The integration of Foster Wheeler must be going well as management have upped their cost savings guidance from $75 million to $125 million. However, oil industry expert Malcolm Graham-Wood hasn't been keen on the acquisition, which brings further heavy exposure to the energy sector - oil and gas made up over £3 billion of AMFW's sales in 2014 thanks to contracts with the likes of Imperial Oil and Shell - "I have been avoiding Amec for a while as I think the Foster Wheeler risk is not worth taking and feel other players in the space are better placed to handle the downturn," said Graham-Wood.

Amec's sales in America, its breadwinner, have fallen from £3.1 billion to £2.7 billion since 2012 and were down 7% last year. Trading profit fell by 12% to £258 million. Although the group order book is looking thinner at £6.3 billion, it still provides decent revenue visibility.

Profits in Northern Europe and the old Soviet Union grew by just by 32% to £137 million. Revenue at Global Power Group, the Foster Wheeler business, fell to £454 million and profit tumbled by over a third to £69 million.

"For 2015, we expect to see a continuation of recent trends - with growth in Clean Energy, downstream and Middle Eastern Oil & Gas markets offsetting tougher conditions elsewhere," said the company, expecting a strengthening dollar to add £150 million to scope revenue. Amec’' share price fell 3% to 935p on Thursday.

A bullish Barclays says:

AmecFW is not immune to the cycle, but it does have a more diversified portfolio and a more balanced geographic footprint than it had before. As such, we expect 2015 scope revenues to be flat on a like-for-like basis, up on currency gains, which we view as a relatively solid performance within the wider OFS [oilfield services] universe.

Margins will be compressed as pricing pressure hits in the eastern hemisphere, as we expected, but with underlying Foster Wheeler 2014 trading profit behind a stale consensus, it is a margin cut off a lower base. Hence we reduce our 2015 EBITDA estimates by 7.2%. The stock trades on 11.6x 2015F PE, mid-range within our universe and with 28% upside potential, we continue to rate it Equal weight, with an unchanged GBP12.50 price target.

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.