Resourceful Kentz scoops up worldwide business

Hugh O’Donnell, chief executive of engineering and construction group Kentz Corporation, has two reasons to celebrate at the moment. The company, which is heavily focused on the oil and gas and mining sectors, has won a major contract with US oil major Chevron for a liquefied natural gas (LNG) plant in Western Australia, which he reckons will be worth $850 million (£531 million) to Kentz over four to five years.

And Kentz, which floated on AIM three years ago at 115p, has recently moved its shares up to the Full List and now trades at 470p. The company, which began life as long ago as 1919 as Irish electrical concern MF Kent, has its eyes on several other LNG projects in Australia and elsewhere and could soon be in line for another big one on the scale of the Chevron deal, which is by far its largest contract to date.

The company is also developing its presence in mining. Earlier this year it clinched a $33.6 million contract for process, construction and commissioning at Australian-controlled Bariq Mining’s Jabal Sayid copper and gold project in Saudi Arabia.

Kentz, which increased pre-tax profits 52 per cent last year to £42 million on turnover up 50 per cent to £660 million, has $230 million (£144 million) in the bank. ‘We have self-financed all our growth,’ boasts O’Donnell, who describes the new Chevron contract as ‘significantly important’.

With an impressive order pipeline building up, the company is looking for modest bolt-on acquisitions in asset enhancement and operations and maintenance. Kentz took over South African project management specialist RNE earlier this year for up to $10 million and is still on the prowl.

Orders won by Kentz last year included a $35 million shutdown contract with National Petroleum Refiners of South Africa for its Natref refinery in Sasolburg, a $30 million-plus emergency shutdown system replacement contract from Abu Dhabi Gas Industries and a three-year service agreement with Shell covering plant change requests by Qatar Shell GTL.

Under the Shell deal, which runs for three years with an optional two-year extension, Kentz is providing engineering, design, construction supervision and procurement services for plant changes and projects for the Pearl gas-to-liquids plant at Ras Laffan Industrial City in Qatar, as well as for its offshore platforms, harbour tank farms, offloading jetties and connecting infrastructure.

With orders like this under its belt, the company ended 2010 with a $1.6 billion (£1 billion) order backlog, more than half to be executed this year. Since then, new deals have been piling up.

The latest Chevron contract, worth an estimated $2.3 billion (£1.4 billion) to Kentz and its 65 per cent joint venture partner, multinational engineering group Chicago Bridge & Iron (CB&I), represents the main phase of the US oil group’s project to develop the Greater Gorgon gas fields, holding an estimated 40 trillion cubic feet of gas, off the coast of Western Australia. Kentz and CB&I, which have been working for two years on the project’s construction village and telecommunications systems, will now carry out electrical and instrumentation work on the project, to establish liquefaction and purification facilities for LNG plants, with an annual capacity of 15 million tonnes.

O’Donnell points out that Chevron will pay the joint venture on a ‘cost-reimbursement’ basis, reflecting the size and complexity of the work and the need for flexibility. This virtually removes the risk of being hit by cost overruns for Kentz, which is providing its services for fees and has no need to invest any of its own capital in the project.
Apart from the money that Kentz expects to make from Chevron, he contends that the Gorgon project significantly enhances its visibility in the international marketplace.

Strategy   
Based nowadays in Jersey, Kentz adopts a ‘fundamental philosophy of following the big international oil groups’, explains O’Donnell, who notes that before the Gorgon project it had tended to concentrate on onshore projects. With crude oil trading at more than $110 a barrel, he says they are continuing to devote major capital spending to new projects, particularly the national corporations, such as Saudi Arabia’s Aramco and Qatar Petroleum.

Mining companies have at times been ‘a bit more hesitant’, but O’Donnell says the outlook now looks ‘very strong’, especially in parts of Africa, such as South Africa, Mozambique, Botswana and Madagascar. Kentz has been doing business with the likes of mining giants BHP Billiton, Rio Tinto, De Beers and Vale of Brazil.

Mining business accounts for 10 to 12 per cent of revenues at present, a proportion that the company would like to increase. As with oil and gas, the aim is to focus on blue-chip clients and, as with the Gorgon project, Kentz will work in joint venture with other companies.

With a pipeline of current potential prospects in excess of $3 billion, Kentz is focusing on organic growth, as well as acquisitions. The company, which is involved in major projects in Papua New Guinea and Far East Russia, as well as Australasia and the Middle East, is making what O’Donnell calls a ‘three-pronged attack’ on its markets.

Kentz, which stresses that risk management is a constant focus, is organised in three principal ‘global business units’. These cover engineering, procurement and construction (EPC), which doubled revenues last year to $336.4m; construction services, which upped revenues by more than a third to $475 million; and technical support services, ahead nearly 30 per cent to $246 million.

O’Donnell is clear that Kentz is working to boost its expertise and activities in related fields, such as process engineering, asset enhancement (for longer-term results) and operations and maintenance. The takeover of project manager RNE was one step in the direction of expanding Kentz’s operational range.

With plenty of cash for the scale of future acquisitions it envisages, the company is unlikely to use its shares for takeovers, says O’Donnell, unless it wished to keep the management of an acquired company interested in playing a role in the wider group.

Naturally, Kentz faces competition in several of the fields in which it operates, from regional and local concerns as well as groups such as consultancy and project management specialist AMEC and facilities expert Petrofac. But O’Donnell stresses the range of services Kentz now offers and which it intends to expand by acquisition: ‘We are really a mix of different companies all under one roof.’  
       
Management
To achieve its goals, Kentz needs the right people. ‘They are the key,’ declares O’Donnell, who joined the company as an engineer in 1991 and became chief executive officer nine years later.

Many senior people at Kentz have also been with the company for significant periods. ‘You need core personnel and management to take the lead,’ insists O’Donnell, who had been with Kentz for barely three years when its management faced the biggest crisis in the company’s long history.

In 1994, Kentz faced collapse after its old management’s pursuit of different sectors with different characteristics had almost led to disaster. The company was rescued from Irish ‘examinership’ (the equivalent of administration in the UK) by influential Malaysian businessman Tan Sri Razali, who has headed several companies in Malaysia including investment group Peremba Holdings and who still chairs Kentz, speaking for a 26.5 per cent holding.

Including O’Donnell’s own 6.4 per cent stake and the holdings of finance director Edward Power, the board holds some 40 per cent of Kentz. The company also has a solid institutional following.

Prospects
O’Donnell sees large contracts in the offing and is particularly enthusiastic about Australasia, where the company grew revenues last year from only $1.6 million to $207.34 million. The company continues to spread its net widely and has been building up asset enhancement work around the world, including Iraq, where it has won infrastructure development contracts with leading oil companies.

The Chevron Gorgon contract ‘gives us a lot to build on,’ argues O’Donnell. He maintains that Kentz, which has maintained respectable margins during three years when turnover has grown an average 30 per cent a year, is well placed to gain from persistently buoyant activity in the sectors it serves.

The company has indicated that it is hoping to clinch another large contract of the same order of magnitude as the Chevron deal, while picking up more modest deals along the way. With activity in its target sectors and regions still buoyant and seen as staying that way for some time, O’Donnell and his team are in optimistic mood.  

City analysts see Kentz increasing pre-tax profits 12 per cent this year to £47 million, but suggest that this could prove to be an underestimate if its enhanced reputation from recent spectacular contract wins can help it to land some more big deals. The opportunities lie not only in LNG projects in Australasia, but in southern Africa, the former Soviet Union and areas of the Middle East, such as Iraq, the United Arab Emirates, Saudi Arabia and Oman.

Valuation
At 470p, valuing the company at £547 million, Kentz shares have risen fourfold between floating on AIM and moving to the Full List and trade on a historic price-to-earnings ratio of 18, which falls to 16 times the 28p a share that the market thinks the company can earn this year. That puts them at a discount to the 20.4 average price-to-earnings ratio for the stock market’s oil equipment and services sector as a whole, which seems undeserved.

Inevitably, a business dependent on winning contracts, especially large ones, can be ‘lumpy’ and uneven in its revenues and profits. Kentz’s hefty order backlog suggests such lumpiness, concedes O’Donnell, who says the trick is ‘to bring in new business faster than you burn off the old’, to iron out potential blips between contracts.  

The backlog is what provides evidence of future revenue and profits potential. Four years ago, says O’Donnell, the company’s ratio of backlog to revenue was 1:1, but now it is more than 2:1, encouragingly enough.

In today’s environment of low interest rates, investors concentrate as rarely before on companies’ dividend payment policies. Kentz’s declared practice is to pay out between 20 and 25 per cent of profits after tax – one third at the interim stage and two-thirds at the end of the year – and the shares now yield 1.5 per cent, which is modest enough but three times the Bank of England’s minimum lending rate.

Kentz shares have performed well since its AIM float in 2008. However, the company is entering a new phase in its growth, with cash in the bank and an enhanced reputation. It looks to be a sound buy for the medium to long term.