Tuesday tips round-up: Petrofac, Mitie Group

19th Nov 2013 07:22

Petrofac's shares fell on Monday after reporting delays to two major contracts and downgrading its profit forecast for next year. With the contracts now not expected to start until 2014, investors are facing more risk as they have an uncomfortable year-long wait before a major ramp up in work, The Daily Telegraph's Questor column noted. Petrofac's share price has become increasingly reliant on the two delayed projects, the $2.5bn Upper Zakum project in Abu Dhabi, and the Berantai contract in Malaysia. "Questor was wrong to keep Petrofac as a buy at £13.73 in August as, since then, shares have fallen 13%," Questor said. "Now, with little growth expected next year and shares trading at 12.3 times adjusted forecast earnings, falling to 9.8 times in 2015, they don't represent a compelling investment case. Hold."Investors punished the company after it warned that net income for 2014 might even be flat, instead of expanding at a 16% clip as the analyst consensus had expected. Nevertheless, the stock may have got off lightly compared to how rivals such as Aker Solutions and Saipem fared following their own warnings. Petrofac retains a lot of operational and financial heft - its order backlog of over $14bn has been growing significantly more strongly than its rivals', and it has modest net debt. That will stand it in good stead given the choppy operating environment. Large customers have been delaying projects and screaming for cost reductions. On the other hand, Petrofac has been growing more strongly because it has taken on execution risk alongside its customers. It has also started taking stakes in upstream assets on which it is working. That explains at least in part why its shares have trailed its UK rivals such as Wood Group and Amec over the past three years. Yet its 2014 price/earnings multiple of 12 is still a discount to the sector. That is not going to close until its earnings become more predictable, the FT's Lex column says.The latest halfway figures from support services firm Mitie provided some reassurance to those who harbour doubts that its margins are sufficient to justify the company's high rating. Mitie is almost entirely out of the low-margin mechanical and electrical engineering work that was the original core business. There is the prospect of growing this business by taking advantage of the trend towards larger contracts and fewer providers. Furthermore, the interims reported organic revenue growth ticking over at 5.1%, which seems sustainable. The shares, up 3p at 317p, have seen a strong upturn since the summer as some of those concerns in the City have been allayed. They sell on about 13 times' earnings and yield about 3.5 per cent. There seems to be no reason why that mid-single-digit revenue growth should not continue, boosted by selected acquisitions, while the prospects for healthcare are attractive. The shares are not cheap historically, but look set for steady progress. Hold, at least; buy on weakness, says The Times's Tempus. AB