Gamble of the week: niche chemical engineer

By Paul Hill Jan 29, 2010

Paul Hill

Share with
friends:

Comments (0) Print this article

With the British economy set to stall again once the general election is out of the way, as an investor I prefer to weight my own portfolio towards companies that derive a large chunk of their earnings overseas.

Take KBC. It is a niche consultant that focuses on the application of advanced chemical engineering and software within the oil refining (85% of sales) and other process industries.

Its client list is a who's who of the sector, including many blue-chip petrochemical companies, such as TNK-BP in Russia and Sinopec of China. Typically, KBC is appointed to enhance plant efficiency, reduce energy consumption, raise capacity and/or decrease carbon emissions. And in terms of geography, 2009's first-half sales were split 26% in Asia, 38% in Europe and 36% in the Americas.

That said the past year hasn't exactly been a bed of roses. The global slump has triggered lower downstream investment in refineries, plus contract delays and cancellations. That has hit consultant utilisation rates.

Nevertheless, what I like about KBC is that it has remained profitable throughout this lean patch, and is still winning new business. For instance, in December the firm bagged a prestigious $4m software deal with Petrobras of Brazil.

KBC Advanced Technologies (Aim: KBC)

So despite some short-term fog, the longer-term picture appears brighter. KBC has established a first-class position in an expanding niche market and has developed proprietary software (30% of sales) that allows it to punch above its weight.

The City is predicting 2009 sales and underlying EPS of £54.8m and 5.8p respectively. This puts the stock on an undemanding p/e ratio of 6.9. That's substantially below the oil services sector, and the stock also offers a 3.7% dividend yield. Moreover, at these depressed levels, there's an outside chance that one of its bigger rivals, such as Schlumberger, could launch an opportunistic bid.

So how much is the group worth? I rate KBC on a through-cycle multiple of eight-times operating profits. Taken together with its £4m cash pile, that generates an intrinsic worth of more than 60p per share. Assuming trade buyers could extract the usual cost synergies, and given a £40m order book plus a stable crude price, I would not be too surprised if KBC was taken over in the next 12 months for somewhere north of 75p.

Of course, the risks are high too, given the uncertain outlook. In particular, there are dangers lurking in process improvement, cut-throat competition and being simply a small fish in a very large pond. All the same I'm not deterred and I would rate the firm a buy for the bolder investor.

Recommendation: SPECULATIVE BUY at 40p

• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments

Comments (0)

Published in Tips & advice | More articles by Paul Hill

Share with
friends:

Related articles

Leave a comment

This will be the name displayed with your comment.

This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.

Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.

captcha To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.

By leaving a comment you accept our terms and conditions.


FREE - MoneyWeek's daily investment emailJohn Stepek

Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.

>