Monday, 5 July 2010

AMEC, the engineering and project management services company, goes nuclear

25 June 2010   Martin Li

According to the investors chronicle, nuclear work offers impressive growth prospects for companies, such as AMEC, who win contracts to decommission nuclear reprocessing and power stations. Clearly a company with shareholders will put profit first and foremost. What effect will this have on safety? Who will pay for this decommissioning? The Government, i.e. we, the taxpayers, will pay for it. Should we be paying for this company to increase their profits over decommissioning?

Analysts reacted positively to a recent visit hosted by energy and environmental consultant, AMEC, to the Sellafield nuclear site - where the group is working on a decommissioning framework contract. The nuclear segment accounts for around 10 per cent of AMEC’s revenues but a larger share of profit - estimated at 16 per cent - due to higher margins.

AMEC set out an ambitious growth programme last December entitled Vision 2015, which aims to more than double earnings per share to over 100p in 2015. Growth in the nuclear segment is part of a wider improvement in the Power and Process division's revenues and margins. With older nuclear plants reaching the end of their lives and coming up for decommissioning, the building of new nuclear plants will be vital to the UK's future energy security.

The peak workload on building new plants will be reached in around 2020, according to brokers, and could boost AMEC's revenues by up to £150m a year. This is equivalent to over 60 per cent of existing nuclear revenues and could equate to an uplift of 30 per cent on the entire Power and Process division’s 2009 profits.

AMEC is exposed to the nuclear sector through the Sellafield contract, as well as having a strong international position, particularly in Canada. This was a good opportunity for buy and sell side analysts to understand AMEC’s exposure to the expanding nuclear sector and to learn about the company’s strategy for growth. We continue to believe that, with Vision 2015 expecting EPS of more than 100p by said date, as well as continued efficiencies and targeted acquisitions, the shares still offer substantial upside.
We continue to believe that AMEC offers the best risk-and-reward balance in our oil services coverage. The shares offer an excellent combination of strong growth (13 per cent per EPS growth per year for 2009-13) and low risk. We think the valuation is compelling, with a cash-adjusted price to earnings ratio of only 10.5 times 2011's earnings and 25 per cent upside to our discounted cash flow valuation. We also think the ability to replicate the Sellafield contract, as future decommissioning management contracts become available at Douneray and the Magnox sites, is a material source of potential upside.


GoodValueGrowth at AMEC's nuclear business could well help it deliver on its Vision 2015 targets and the Sellafield contract provides a solid base from which to expand. What's more, and after stripping out the hefty £743m cash pile, the shares - at 840p - aren't demandingly rated for such prospects. Long-term good value.

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