US Edition Petrofac
906½p -7p
Questor says BUY
The problem is, companies require funds available to be able to maintain investment.
Middle Eastern oil groups are flush with cash. They understand this fact about investment at the bottom of the cycle and one of the major beneficiaries of their spending is Petrofac.
In the first half of the year, Petrofac won an amazing $5.8bn (£3.5bn) of new orders, compared with $1.7bn in the first half of last year. This means the group order book at the end of the half year rose to $8.4bn from $4bn at the interim stage last year.
These figures do not include the recent $2.1bn deal to build a natural-gas-to-liquids (NGL) train, a contract won by Petrofac's joint venture in Abu Dhabi. Petrofac's share of the contract was $1bn.
Ayman Asfari, chief executive, said that not only had Petrofac's customers continued to spend through the economic cycle, the group has also been able to win new clients. Most of its projects are profitable with oil at $70 a barrel, he added.
Petrofac also has a very strong balance sheet with $900.2m of cash in the bank and a net cash position, once borrowings are excluded, of $787.6m.
The company hiked its interim dividend by 43pc to 10.7 cents per share, which is a reassuring sign of management confidence. However, there was plenty of scope to do this, as the shares are yielding just 2pc.
The company has also committed to distribute 35pc of full-year after-tax profits as a dividend. The interim payment will be paid on October 23 and the shares go ex-dividend on September 23, so new investors can buy now and bank this payment.
After yesterday's results statement the shares hit a new 52-week high, but then pulled back sharply. But it is hardly surprising after such a strong run that the shares should see some profit-taking, as they have almost tripled since their low in December last year.
Petrofac shares are also trading at a premium to peers, but Questor thinks that this is deserved. The shares are trading on a December 2009 earnings multiple of 16.2 times, compared with John Wood Group's December 2009 multiple of 13 times. However, Questor believes that this premium is warranted for a number of reasons.
The company expects earnings to grow 20pc this year; it has a strong presence in the key global energy market of the Middle East; and management have proven their abilities to win new contracts. There is also likely to be continuing progress on the dividend. The company also says that after a subdued period, activity in the North Sea is now starting to improve.
The shares were recommended on March 10 at 468p and they are now 94pc ahead of their initial recommendation price.
The shares are unlikely to continue to move higher at the breathtaking rate we have seen over the past few months but, with good prospects in a key global market, the stance on the shares remains buy. The company is a long-term play on growing global energy demand and structural investment in the key oil markets of the Middle East.
Bunzl
576½p +24½p
Questor says BUY
Consumables distributor Bunzl posted a reassuring interim update yesterday, its shares underperformed in the first part of this year. The shares were initially recommended on December 21 at 571p and then as one of Questor's tips of the year at 606p.
The company has a very simple business model. It sources and supplies all the items that a business consumes – and it does so cheaper than its customers could themselves. The company has a high exposure to foodservice – especially in the US – so about 75pc of its profits are relatively recession resilient.
The company tabled a good set of interim numbers, given the market backdrop. Pre-tax profits rose 4pc to £115.5m, but at constant currencies there was an 11pc fall. Revenues rose 17pc to £2.3bn, with the figure at constant currencies down by 1pc. However, with the recent strengthening of the pound, the currency positive currency effects are expected to be low for the year as a whole.
Margins in the second half are expected to improve, as the group's cost-cutting measures kick in. Headcount reductions are expected to result in estimated cost savings of £18m over the full year, with £8m of these benefits realised in the first half.
The UK & Ireland business has been hit quite hard by the recession, with operating profits down 37pc. This is because of the company's higher exposure to non-food business and the severe economic problems being faced by Ireland. However, US operations were strong.
The company has made two small acquisitions in the UK this year from a distressed seller. The company is on the lookout for suitable purchases, but it is unlikely that there will be a flurry of purchases any time soon.
The group is extremely cash generative and this helped reduce net debt by more than market expectations. Net debt at the end of the first half stood at £754.3m, £116m lower than at the end of 2008.
The shares are trading on as December 2009 earnings multiple of 11.1 times and yielding 3.6pc. The stance on the shares remains buy.