Amec Plc (AMEC)

Creating operational excellence

Over the last couple of years, leading international project management and services provider AMEC plc (LSE, AMEC) has undergone an exciting restructuring programme that has given the group better focus and direction. This was accelerated in our opinion by the leadership of CEO Samir Birkho, who joined the group around 16 months ago.

Considering our bullish view on the energy and commodities markets, it is no wonder then that the company's Natural Resources segment, the largest division accounting for more than half of profits, has seen solid contract volumes so far this year.

And it is not just top line growth that has been a feature. Operational efficiency measures have also led to an improvement in segment profitability.

AMEC's second largest segment, Power and Process has also seen strong growth in 2007 with major UK contract wins and a solid North American market.

In addition, the smallest division of the group, Earth and Environmental, has also experienced good growth in 2007 despite a weakening US dollar. 

Meanwhile, the group's efforts in restructuring the business will, initially through the STEP change programme and now with the Operational Excellence plan, look to further underpin earnings.     

We support the group's rigorous approach in implementing the programme and are encouraged that it has fostered a culture of accountability for all levels of management through this transparency. The unswerving focus on enhancing profitability adds further to our optimism.

In terms of AMEC's cash position, after shedding non-core businesses, the divestments resulted in a post tax gain of £220 million and cash of £330 million. This, together with strong cash flow from operations, will see the group's net cash position at 2007 year end at around £650 million. We believe this places AMEC in a solid financial position to capitalise on acquisitions that offer a strategically complementary fit with core businesses.

Looking at the valuation parameters, the shares appear reasonably priced at 17.8 times prospective 2008 earnings and yielding 2.3 percent, based on Bloomberg consensus estimates. As such, with the implementation of operational improvements that will continue to enhance returns, financial capability to target strategic bolt-on acquisitions and a robust outlook for the group's businesses, we believe AMEC's fundamentals remain solid.

In a relatively short period of time, a strong management team headed by proactive CEO Birkho has transformed AMEC from a distracted support services company into one with clear and accountable strategic direction. This transformation leaves it in good stead to improve profitability and returns that in turn should lead to the creation of further shareholder value.