Companies: KBC   

Following a spell in the doldrums, energy industry consultant KBC Advanced Technologies signalled its turnaround with a return to profit last year. Improving earnings by broadening its service range, the company, whose clients include Malaysian oil and gas behemoth Petronas, Chinese petroleum giant Sinopec and Spanish energy group Cepsa, offers exciting growth prospects based on the global oil boom.

KBC, which has offices in the UK, the US, Canada, Singapore, Russia, China, Japan and the Netherlands, helps oil refinery operators maximise profits and better utilise their assets through process consulting, strategic planning advice, energy price forecasting and market analysis, and capital project services and training. KBC also provides an innovative simulation software tool known as Petro-SIM, which enables refinery owners to identify ways of improving operations.

With crude oil prices remaining near all-time highs, strong refining industry margins are set to continue for the foreseeable future, which is great news for KBC. Refinery margins at historically high levels drive growth in ‘new and revamped’ projects as refiners look to increase and protect their market share. And even if margins reduce, refiners need to find new ways to stay competitive and contend with safety and environmental red tape, forcing them to spend money on capital projects.

KBC, led by chief executive George Bright, intends to grow its services among refining clients accordingly. ‘Oil demand is growing irrespective of the cost of oil and, though refining margins have recently fallen back, historically speaking returns are still spectacular,’ says Bright, ‘and that’s not likely to change.’

Bright and operations and finance director Nicholas Stone were the chief architects of the group’s swing into the black in 2006 and recent interim figures to June demonstrated an ongoing strong performance. Though sales growth to £18.4 million was modest at six per cent, pre-tax profits gushed 260 per cent higher to £1.4 million and earnings surged 250 per cent north to 1.6p as KBC capitalised on improved consultant utilisation rates and fee inflation as well as a focus on cost.

‘Our performance reflected growth in our consulting margins to 37 per cent,’ explained Stone, ‘as well as a drop in our direct costs.’ Building on the 0.5p paid for 2006, investors were treated to an interim payout of 0.25p, reflecting the management’s confidence in the sustainability of the turnaround. ‘We believe we’ve got a good story so we decided to pay a dividend,’ adds Stone.

The company’s focus on growing sales in a buoyant market led to first-half contract awards increasing 60 per cent to £19 million, with the resultant half-time order book 24 per cent above the comparable period in 2006 at £28 million.

The strategy of broadening the service range has proved successful because it has reduced dependency on profit optimisation contracts. The growth areas include support on capital projects and energy services. Demand from refinery clients is being driven by rising energy costs, and KBC recently won its first project to measure and reduce carbon emissions at a Californian refinery.

Furthermore, safety concerns are fuelling human resource improvement service revenues in North America. ‘Our human performance business (involving operating procedures and best practice manuals) provided a bright spot. We are selling particularly well in the Americas, where there is pressure on American refiners following the BP Texas incident,’ said Bright. ‘And in Europe, the Middle East and Africa, we are seeing ongoing work on capital projects for new-build refineries, which we like to be involved in right from the outset.’

Buoyed by the recent encouraging financials, Bright and Stone are now on the lookout for larger corporate deals that will boost the size of the group and enable KBC to build its profit margins. ‘We need a step change in scale and to get our efficiency levels up,’ Bright explains.

For December 2007, house broker Arden Partners is forecasting pre-tax profits of £2.9 million, an upgrade from £2.7 million, and 43 per cent earnings growth to 3.3p. By 2008, KBC could conceivably deliver profits of £3.1 million and 3.7p of earnings, representing more modest 12 per cent year-on-year earnings growth, as well as a rise in the dividend from 0.7p to 0.9p. Given market buoyancy, the strength of the group’s turnaround and forecast 2007 earnings growth, a forward multiple of 13.5 looks miserly.

KBC Advanced Technologies	AIM	£16.27m	28.50p	-1.00p
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