Redhall Group

Engineering support services star Redhall moved sales and underlying profits in the right direction in a testing half to March.

Adjusted pre-tax profits, before £491,000 of restructuring and re-branding costs, rose 6% to £3.3m on a marginal top-line increase to £65.4m (2009: £64.8m), while the strongly cash-generative Redhall ended the period with £7.5m (2009: £6.3m) net cash, underpinning a 9% dividend hike to 1.8p.

During a more difficult half, Redhall continued to benefit from the resilience of its Energy and Defence divisions. Margins grew from 7% to 8% in Energy, thanks to a shift towards project-orientated work, particularly in the oil and gas sector. And while the civil nuclear market, where Redhall operates at Sellafield, proved subdued, order intake improved and the board insists ‘the Nuclear Decommissioning Authority will continue to view our areas of activity as key strategic priorities’, allaying any budget cut concerns.

Margins expanded significantly in Defence, where the company experienced especially buoyant trading within engineering services to the Ministry of Defence. The one divisional disappointment was the Process arm, where profits reversed 29% to £900,000 amid ‘intense competition’ in a depressed market.

Having re-branded its engineering and nuclear businesses under the Redhall banner, the group is now starting to win larger, higher margin contracts, such as the recent £30m Vivergo Fuels bio ethanol plant win. Winning market share, Redhall should show ongoing resilience, since its £130m order book is positioned in key energy and defence areas that should be unaffected by spending cuts. And with its strong balance sheet, Redhall is well placed to continue investing in organic development and complete earnings-enhancing bolt-on acquisitions.

For September 2010, pre-tax profits are expected to grow from £6.5m to £7.1m, as sales swell from £129m to £140m. Based on estimated earnings of 17p and a likely 4.8p dividend, Redhall shares, offering up a 3.3% yield, look significantly undervalued on a single figure p/e. Strong buy.