Engineer’s winning formula is set to deliver steady growth

published 13 September 2012

I like high-quality, dividend-paying stocks with sound balance sheets, good track records and big order books. Kentz Corporation, an engineer with a £460m market capitalisation, fits the bill.

It operates in the oil and gas (55% of sales), petrochemical (16%), mining (21%) and power sectors (8%), providing services to clients such as Exxon Mobil, Chevron and Sasol. In the first half year, revenues rose by 9% to $703.7m and profits by 36% to $51.2m.

This was driven by impressive performances from the Americas (13% sales) and Australasia (26%), but partly offset by declines in regions such as Africa and the Middle East. Net cash jumped 36% to $241m, in turn bullet-proofing the balance sheet and enabling the interim dividend to be hiked 10% to 5.5 cents.

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Combining geographical diversification with a focus on emerging markets seems to be a winning formula. By June, the order backlog climbed to $2.52bn from $1.57bn the year before. Recent new wins include work on the Queensland Curtis liquefied natural gas (LNG) project and a $128m contract for Syncrude's mine relocation in Alberta, Canada.

Kentz Corporation (LSE: KENZ), rated a BUY by Investec

Christian Brown, the chief executive, notes that Kentz's current prospects entail a "significant number" of near-$100m deals with favourable margins. The firm is bidding on $4.4bn worth of opportunities to be awarded within the next 12 months, and on a total pipeline of $12.8bn.

Brown is especially upbeat about Australia, Iraq, Saudi Arabia, Canada and Russia. "Despite the continuing uncertainty in the global economy, demand for our diversified services remains strong, with our backlog and solid pipeline of prospects leaving us well positioned to deliver future growth."

Broker Investec is forecasting 2012 turnover and underlying earnings per share (EPS) of $1.50bn and 56.1 cents respectively, rising to $1.58bn and 62.2 cents in 2013. Kentz trades on a price/earnings (p/e) ratio of 11 and pays a 2% dividend yield (four times covered). I'd rate the stock on a ten-times earnings before interest, tax and amortisation (EBITA) multiple. Adjusting for cash and minorities, that generates an intrinsic worth of 470p per share.

Risks include exposure to the volatile oil/commodity markets, foreign-exchange movements and cost overruns on large projects. Yet Brown notes there have been few delays or cancellations to affect the outlook for 2012 and 2013.

Investec has a price target of 600p. The next trading update is scheduled for Friday 16 November.

Rating: BUY at 395p

Paul Hill also writes a weekly sharetipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI, or phone 020-7633 3634 for more.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.