Shares digital

Kentz Corporation (KENZ:AIM) – 145p, stop loss 116p

SHARES SUMMARY

Recently floated Kentz is on a bit of a roll. Its shares have jumped from a low of 115p and should hit 180p by Christmas due to the booming oil business, and a maiden dividend is expected this year.

Business:

Engineering and construction services specialising in the oil & gas sectors

Vital stats:

Market value: £169 million

Historic PE 2007: 11.2

Prospective PE 2008: 10.2

Prospective PE 2009: 9.1

Sector PE: 10

1-month relative strength: 14.1%

1-year relative strength: n/a

Yield 2007: n/a

NMS: 3,000

Spread: 3.4%

Kentz is a fast-growing hybrid engineering/construction group with oil & gas expertise. Three-fifths of its profits and 80% of its $680 million order book (up $100 million in the past three months) is from the Middle East to build petrochemical plants, refineries and gas-processing units.

There is no sign of the oil boom – which has fed its growth thus far – abating in the near future, with record prices based on record demand fuelling record order books. A huge rise in investment is taking place to increase output as rapid growth is expected to continue in emerging economies such as China, India and Russia.

Best guesses for oil prices in a year’s time are pretty much the same as now at around $100 a barrel, assuming US demand eases slightly.

Kentz is riding the boom big time. Better-than-expected results announced this week showed profits soaring 37% to $34.3 million and cash more than doubled to $124 million, or 37% of its market value. Gulf states plan to spend $1,100 billion on industrial projects over the next five years, of which a third will be oil & gas plants.

The International Energy Agency forecasts that global oil & gas demand could rocket by 51% by 2030, requiring $6 trillion of investment.

The rest of Kentz’s orders come from energy and mining projects in Russia, South Africa and Australia. The company employs 8,000 people in 20 countries.

The group has won an excellent reputation for delivering on time and budget in often harsh and complex environments. Its most profitable projects are in tough places, such as Sakhalin Island for ExxonMobil.

The big risk is mis-pricing the mostly fixed-price contracts. Happily there have not been any major mistakes in the past decade.

A substantial amount will be spent buying companies in upstream oil & gas to increase the group’s engineering expertise so as to provide a one-stop service and capture a bigger slice of a project’s profits.

This will allow Kentz to broaden its business to marginal oil & gas field development, including complete early production process plants, offshore deepwater solutions and complete small to medium size process plants, both onshore and offshore.

More emphasis on technical support and services means Kentz will gain an increasing revenue stream from maintenance and upgrading plants. Management also wants to negotiate more joint ventures and alliances to reduce and diversify risks.

Profit margins jumped from 4.8% to 6.3% last year, and the target is to edge them up a tad to 7%, which is near the top of its sub-sector.

House broker Evolution Securities believes Kentz is still 20% undervalued compared with its peers in the oil services industry. For a company in such a stock market sweet spot, a prospective PE of ten this year, falling to nine in 2009 is undemanding to say the least.

by: Timon Day