US Edition Senior
24.25p -2.25
Questor says BUY
With global markets in turmoil, now may not be the best time to take part in some contrarian investing. That’s why Questor has favoured defensive plays for the last few months.
However, with valuations tumbling across the board, real value is appearing in a number of sectors. When sentiment is extremely low, brave investors taking a long-term view could make substantial profits by investing in out-of-favour sectors.
Today Questor presents one such opportunity. However, investors must be aware that this investment is riskier than the usual conservative investment strategy favoured by this column.
Shares in engineering group Senior have been battered by the outlook for aerospace and automobiles. Questor believes that the falls look overdone and that the shares are a buy.
The company manufactures high-technology components and systems for the civil aerospace, defence, automotive and energy markets. All of these industries are facing extreme challenges at the moment – and that’s why the group’s shares have fallen 80pc since their peak 12 months ago.
Despite concerns about the future, the company posted an excellent set of 2008 numbers this week, which were ahead of market expectations. In the 12-month period to December 31, revenues rose 19pc to £562.4m and earnings per share jumped 38pc to 10.63p. However, 2009 will undoubtedly be tougher.
Management have rapidly moved to cut costs and Questor is impressed by this flexibility.
The company operates in two divisions – Aerospace, which contributes 52pc of group turnover and Flexonics, which contributes the rest.
Flexonics manufactures exhaust connectors, cooling and emission control components and diesel fuel distribution pipework, among other things.
The shares are pricing in a doomsday scenario, but things are probably not as bad as they seem, particularly in aerospace.
Boeing and Airbus’ combined order books stand at around eight times current annual deliveries. Of course, there are likely to be cancellations, but this large backlog and the expected launch of Boeing’s 787 Dreamliner later this year should be supportive. It must be noted that Boeing has delayed launch of the 787 on three occasions so far.
Given the well-publicised troubles in the auto sector, the company is expected to have a challenging year in this sector. Land vehicles accounted for 53pc of sales at its Flexonics component division, but the market fell sharply in the second half of the year. However, the remaining 47pc of divisional sales are made to industrial markets, most of which remained strong.
The company has refinanced its debt and no material refinancing is now due for the next three years. Net debt was £174.5m at the year end, which is comfortably within banking covenants.
One thing Questor is keen on is cash generation and Senior has been impressive on this front. In 2008 its free cash flow soared by 183pc. Free cash flow has risen by a factor of ten since 2006.
The shares are trading on a 2009 earnings multiple of just 2.6 times, reflecting concerns about growth. However, revenues are not expected to fall substantially.
Because the shares have been battered by negative sentiment, they are current yielding a staggering 13.3pc. This dividend is three times covered by earnings, so it can be maintained even with a fall in revenues. However, there are no guarantees that it will not be cut.
Despite the fact the company operates in a sector that is out of favour Questor believe it will survive the downturn. With this in mind – and with one eye on the yield – the shares are a buy.
Wood Group
184p -1.25p
Questor says BUY
Subdued oil prices meant news from John Wood Group on Tuesday was unsurprising. The company posted a solid set of 2008 numbers, but indicated that 2009 would present challenges.
The share are trading lower than Questor’s last buy recommendation of 195½p on December 23, but Questor noted that time that the shares would not really start moving until the oil price started to rise. But Questor feels that the shares are still undervalued.
There is in no doubt that the company is going cheap. The shares are trading on December 2009 multiple of just 5.9 times. Historically, oil services groups in the UK have traded on multiples in the high teens, with US peers trading in the low 20s.
Around 55pc of company revenues relate to oil company operating expenditure rather than capital expenditure, which is more defensive. Oil companies will keep their wells going, but are likely to cut back on exploration.
The shares are a bargain at this level for investors with a long-term view. Once the current economic turmoil subside the oil price is certain to get moving again. When it does, Wood Group share will outperform again.
Although 2009 is likely to be tough, the company’s earnings look to be pretty resilient because of its exposure to operating expenditure. The hike in the 2008 dividend is a sign of management confidence and the move means the shares are now yielding 3.6pc. This is not spectacular but it looks safe as it is more than four times covered by earnings.
It may be a long-term play, but at this valuation, Questor definitely says look through the next year or so and buy.