US Edition VT Group
567p +10
Questor says BUY
VT Group caused a storm last week when it said it would be interested in buying the Met Office, the Government-owned weather forecaster. Union representatives of Met Office staff said any privatisation plan would be "unworkable" and councillors near the Met Office's Exeter base claimed such as move could lead to forecast of a poorer quality.
VT is the old Vosper Thornycroft – the ex-shipbuilding giant – so it may seem peculiar that the company is talking about the Met Office. However, it is not. VT has changed beyond recognition and is even changing its market sector to reflect this.
Earlier this year the group completed the sale of its shipbuilding assets to BAE Systems and it is now a pure outsourcing contractor. On December 21, the company's share listing will move from the Aerospace and Defence sector to Support Services.
The sale of its shipbuilding assets brought in about £350m and the group is now sitting on a £400m cash pile. It is actively seeking complementary bolt-on acquisitions. The idea of VT Group buying the Met Office isn't so ridiculous. VT already does significant business with the Ministry of Defence (MoD), which runs the Met Office, and the BBC, a main customer.
Another potential purchase is the MoD's Defence Support Group (DSG) if the next Government should put it up for sale in an outsourcing drive. DSG provides maintenance, repair and other support services for the UK armed forces' air and land systems.
This would be a good fit. VT has already won a £160m contract to provide initial flying training for all three Armed Forces, making it the UK's leading support company for military flight training.
The group is also has also moved into waste management. VT plans to use its extensive engineering expertise to design and operate plants which will convert waste into fibre, which can then be processed by anaerobic digestion.
This is a good long-term business to be in. The UK is well behind the rest of Europe when it comes to waste disposal. A recent report by the Green Alliance for Defra calculated that 54pc of UK waste still goes into landfill, one of the highest in the Continent. This has to change as landfill taxes are set to rise. They will increase to £56 per tonne in 2011, £64 in 2012 and then £72 in 2013.
Another growth business area in which VT is involved is nuclear services. It offers waste packing, decommissioning and testing services, amongst others.
The group's interim numbers, which were released last week, were good. In the six-month period to September 30, revenues rose 26pc to £571.1m and pretax profits jumped 53pc to £32.8m. The order book stands at an impressive £4.4bn with a bidding pipeline of £8bn. The interim dividend was hiked by 10pc to 4.3p. The shares are now yielding 2.8pc.
VT shares were recommended on December 7 last year at 483p and the shares are now 17pc ahead compared with a market up 24pc.
Trading on a March 2010 earnings multiple of 14.4 times and falling to 12.9 next year, the stance, based on the prospects for outsourcing in the UK, remains buy.
RM
160½p +8½
Questor says BUY
The market has been cold on prospects for educational IT company RM. However, yesterday's figures should reassure as they beat market expectations and the tip is once again above the recommendation price.
The main concern has been over the prospects of the Building Schools for the Future (BSF) scheme in the UK. As public sector belt-tightening looms, the budget is expected to be trimmed.
RM argued that the majority of revenue in its UK education resources and schools learning technologies businesses comes from frontline budgets. In the tax year to April 2010 these budgets have already been fixed and showed real-terms growth on the previous year.
RM says that growth in its BSF business was underpinned by the 14 contracts it has already won and its bid pipeline is larger than it has ever been.
However, the company is expanding internationally, particularly in the US. The Obama administration has prioritised education as part of the American Reinvestment and Recovery Act (ARRA) and has specifically identified technology as an area for investment. The UK is significantly ahead of the US in the deployment of interactive classroom technology, so RM can transfer what it has learned in the UK to the US.
In the year to September 30, pretax profits rose to £16.3m from £15.4m on revenues that were 20pc ahead at £346.9m. The balance sheet is strong with the group having a net cash position of £5m. The full-year dividend per share is 6pc ahead of the previous year and the final payment of 4.85p will be paid on February 5. This leaves the shares trading on a solid dividend yield of 4pc.
The shares were first recommended at 159½p on July 5 so they are just 2pc ahead of their recommendation price compared with a market up 25pc. The shares are trading on an 2010 earnings multiple of just 10.3 times, falling to 8.8pc next year. Questor believes that the company is operating in an excellent global market and the shares look undervalued. Buy.