Gamble of the week: specialist engineer with a bright future

By Paul Hill Nov 20, 2009

Paul Hill

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October was a month to forget for Redhall. The shares tanked 30% as this specialist engineer for the nuclear, defence and process industries released a shock profits warning. That was down to purchasing delays at the Nuclear Decommissioning Authority and softer demand from some of its chemicals customers. Yet the sell-off looks overdone.

Firstly, the numbers aren't that bleak. House broker Altium is still forecasting 2009 revenues and underlying EPS of £125.5m and 15.5p, rising to £139.4m and 16.9p in 2010. That puts the stock on frugal p/e multiples of 9.1 and 8.4, while it offers a 3.5% dividend yield. Redhall ended September with net cash of £6m, on top of a chunky £117m orderbook (up from £110m in March).

Next, Redhall's long-term prospects still remain bright. Its nuclear interests in particular look well placed to benefit from the government's plans. These include spending £50bn on building ten new nuclear power stations, as well as £74bn on decommissioning nine existing plants.

Redhall ( Aim: RHL )

On top of that Redhall's defence unit, which is located at the Atomic Weapons Establishment (AWE) at Aldermaston, continues to perform strongly. It is working on the Astute Submarine programme, together with designing a £9m high-explosive fabrication facility for the AWE.

Given its cheap valuation, and coveted nuclear expertise, I could even see a larger rival pitching in with a bid.

But how much is the group actually worth? On a standalone basis, I would rate the firm on an eight-times enterprise value to earnings before interest, tax and amortisation multiple. After adding back balance sheet cash, I put the firm's value at around £2 per share. In the event of a takeover bid, the price could top £2.50.

So what should investors watch out for? As with any small company, Redhall may be squeezed by larger players. It could also be hit by further order delays flowing from the uncertainties created by the general election. That said, those risks are more than reflected in the depressed rating – and so the shares are still a buy. Full-year results are due out on 3 December.

Recommendation: speculative BUY at 147p

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

Published in Tips & advice | More articles by Paul Hill

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