29/10/2007
Nuclear decommissioning and the building of new reactors underpin prospects at Redhall Group, the engineering support services group formerly known as Booth Industries. Following the appointment of a new management team led by entrepreneur David Jackson in 2005, a once lacklustre venture has been rejuvenated and set upon an ambitious growth path.
On arrival, Jackson conducted a strategic review of a neglected business that boasted under-exploited growth opportunities in sectors such as transport infrastructure, defence, and oil and gas. More exciting, however, was its position in the buoyant nuclear market.
‘Nuclear is the only sustainable energy source in the UK,’ claims Jackson, ‘so you are going to see new reactors and we think there is a huge opportunity to look after the legacy issues. We expect to see a clean-up then a new-build programme.’
Already turned around and demonstrating stellar growth, Redhall is a strongly cash-generative venture with improving margins and excellent earnings visibility.
Strategy
Redhall is building on strong niche positions in nuclear services, engineering services and specialist manufacturing, both organically and through acquisitions. Core to the new management team’s strategy is the fostering of long-term ties with key clients by boosting the group’s offering to them.
The company’s six niche engineering services businesses serve regulation-driven markets with high barriers to entry such as oil and gas, food manufacturing, defence and the aforementioned nuclear market, where Redhall has an excellent track record.
Redhall is a services contractor at Sellafield and Trawsfynydd, a facility in North Wales owned by the Nuclear Decommissioning Authority (NDA), which leads decommissioning projects in the UK, but managed by long-term client British Nuclear Group. Redhall’s Steels Engineering Services business, acquired for £2.1 million in January, is a ‘key term contractor’ for nuclear projects carried out within the highest security radiological areas of AWE Aldermaston, the Berkshire headquarters of the Atomic Weapons Establishment. ‘AWE has rated Steels as its best contractor,’ assures deputy chief executive Simon Foster.
Within engineering services, Redhall provides design, facilities management and project services to the oil, gas, petrochemical, food and pharmaceutical industries, where its profile is increasing quickly. Food is proving to be a particularly buoyant sector and management is excited by prospects in the burgeoning petrochemical market along the Humber Bank.
Jordan Manufacturing makes high-grade stainless steel for specialist manufacturers and architectural industries as well as the nuclear market. ‘Growth here is also decommissioning led,’ explains Foster. ‘Decommissioning drives container demand and everything needs a stainless steel container of some sort.’ Meanwhile, Booth Industries is a globally recognised expert designer, maker and installer of blast- and fire-resistant doors and walls used in the oil and gas, defence and nuclear industries. ‘We are the blast experts,’ proclaims Jackson, ‘and our brand is high end.’
Earnings-enhancing acquisitions are helping to swell the array of services the group offers clients and increase its exposure to different markets. For instance, Steels has accelerated the growth of Redhall’s nuclear engineering activities and increased its penetration into nuclear facilities, at which a good safety track record is vital. Coming with £6 million-plus of orders, Steels is also throwing up cross-selling opportunities for the manufacturing division in the nuclear sector.
Within engineering services, the high-margin Jex Engineering, purchased for £11.9 million in May and having a £7 million-plus order book, has brought greater design and engineering skills to Redhall. Jackson is now keen on nurturing Jex’s skill set by acquiring ‘something in electrical contracting and design’.
On strategy, Foster summarises developments thus: ‘Our first year was about turnaround, whereas last year was about growing businesses we already had and completing acquisitions. This year, we are determined to build the business in terms of geographical reach and labour force.’
Management
Executive chairman and chief executive David Jackson is a no-nonsense entrepreneur who doesn’t suffer fools gladly. He won City following with infrastructure services group Peterhouse, which he morphed from a staid construction group into a racy support services concern. Peterhouse was controversially sold to Babcock International in 2004 in a £106 million deal (recommended by the rest of the board) that Jackson bitterly opposed as undervaluing the business. He even tried to mount a rival management buy-out, which proved unsuccessful, and left shortly after the takeover. A serial entrepreneur and horse racing enthusiast, Jackson also acts as a non-executive director of various private companies.
His youthful deputy chief executive is 36-year-old Simon Foster, appointed to the board shortly after Jackson and previously the corporate development director at Peterhouse. Highly enthusiastic about growth prospects and acquisitions completed, Foster is a qualified solicitor and was previously a director of corporate finance at Arthur Andersen.
Overseeing the numbers is finance director Chris Lewis-Jones, a chartered accountant who joined the board in late 2001 from Ernst & Young, where he earned his spurs as assistant director in corporate finance. Lewis-Jones brings solid merger and acquisition experience to the table.
Prospects
Since Jackson’s arrival, the group has registered some impressive figures and these look set to continue. Results for the year to September 2005 from what was then Booth Industries were uninspiring, showing operating losses of £263,000 on flat turnover of £27.9 million. Blotted by legacy contract issues, the results omitted a dividend.
Having cut costs, resolved legacy contract issues and sharpened the strategic focus, Jackson signalled the start of a meaningful turnaround with results to March 2006, which showed the group’s first interim profit for four years. Annual figures to September 2006, the first full year under new management, revealed the first annual operating profits since 2001, the reinstatement of a dividend and the news of a £40 million forward order book. More recent interim figures to March 2007 revealed a 340 per cent surge in operating profits to £886,000 on turnover up 59 per cent to £22.3 million, reflecting good levels of organic growth. Some £22 million of nuclear services contracts won increased forward orders to almost £60 million, offering investors an excellent level of earnings visibility.
In a bullish pre-close trading update, management said results for the year to September would be slightly ahead of forecasts following another year of strong growth. Of particular interest was news of a three-year, £9 million contract awarded to Steels for the supply of labour and management services to AWE as part of its investment programme at Aldermaston and Burghfield.
When the figures come out in December, analyst David Phillips at Altium Securities is looking for sales growth from £31.6 million to £55.4 million, as well as a leap in pre-tax profits from £800,000 to £2.2 million. For 2008, with contract momentum picking up, he has pencilled in further profits progress to £4 million from £83.4 million sales, ahead of £4.7 million from revenues approaching £92 million by 2009.
Valuation
Phillips has set a 315p target price for the shares, which have appreciated impressively during Jackson’s tenure at the helm, racing up from the 25p mark to a 52-week peak of 273p, before settling back to present levels around 250p. Based on forecast earnings of 8.8p per share for September 2007, Redhall is trading on a rather lofty forward price to earnings ratio of 28 times for 2007. However, the rating drops to 19 times and then 16.5 times for 2008 and 2009, based on forecast earnings per share of 12.9p and 15p respectively.
These forecast earnings figures (an increase of 47 per cent for the current year and an additional 16 per cent rise to September 2009) are all before any further acquisitions. And bear in mind management prefers to under-promise and over-deliver. Based on those numbers, Redhall is trading on a price/earnings to growth (PEG) ratio of 0.4 for 2008, which suggests good value given management’s previous credentials and the group’s nuclear industry-inspired growth potential.
Valued at less than the £60 million of forward orders flagged up at the interim, Redhall is also a strong performer in terms of cash that is beginning to build its income appeal, with payouts of 2.3p, 3.8p and 4.3p forecast over the coming years. We are enthusiastic backers of this business.
| AIM | £54.26m |
184.00p
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-1.50p
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