Broker snap: Look to 2010 for RPS recovery

8th Sep 2009 11:37

Acquisitive environmental consultant RPS Group could be back on the acquisition trail when markets recover as smaller businesses look for a backer with the working capital to finance growth, broker KBC Peel Hunt reckons.The company has a good record on the acquisitions front, but enthusiasm for the shares has been dampened this year by a weaker trading outlook for the group's energy division despite the rising oil price. Ordinarily an oil price hike would drive an increase in spending by RPS's clients in the oil sector; instead, the cloudy economic outlook is prompting clients to remain cautious with their spending plans.'Investors ought to start looking through 2009 and consider the impact a recovery on spending may have on earnings in 2010 as global Energy clients look to secure scarce resource,' KBC analyst Andrew Nussey suggests. 'We estimate that a £10m (2%) rise in revenues could lead to a 3% rise in EBITA [earnings before interest, tax and amortisation] given the potential operation gearing.'Once the energy market starts to recover then 'investors should start to then anticipate a recovery in RPS's other markets,' Nussey argues, though he concedes 'that this recovery may not be rapid.' Nevertheless, as market leader, 'RPS will be an early and relative beneficiary,' while its low cost base 'should see revenues translated into superior growth and cash glow.'KBC has reiterated its 'buy' recommendation on the shares for which it has a price target of 250p. 'While we have no certainty on the timing of recovery we are certain of the underlying cash generation capability and hence a 2010 free cash flow yield of 8.9% looks good value,' the broker asserts.