Friday, 6 November 2015

Atkins (ATK LN) ... as night follows day

Friday 6th November 2015

Coming up to two years ago I sold short in Weir Group (WEIR, mkt cap £2.4bn), at 2,094p/shr.
Demand driven short

I quickly covered the short about a month or so later at around 2,300p/shr. I closed in the midst of a sharp run up in Weir's price, driven by spurious bid speculation and a short squeeze; short interest at the time was 12%. The market then was also fairly unforgiving for shorts, still being juiced by QE, statements of "whatever it takes" and all that.

Weir's shares peaked at 2,848p and loitered above 2,500p through to September 2014. 

It's a pity I didn't review my bearish view on Weir in H2 2014. The shares have since collapsed to 1,136p.

Weir share price
Source: Bloomberg
The rationale behind my short was pretty straightforward. For months, Weir's customers had been broadcasting an enormous contraction in their collective capex plans in the years ahead. Hence, it was obvious to me, that as night follows day, that Weir's revenue and margins would come under pressure following that contraction in demand from its principal customers. And yet for some reason, consensus earnings expectations remained absurdly optimistic.   

In early 2014, I'd calculated that Weir's top 13 customers* accounted for 32% of its revenue and from those customers' capex guidance, they were about to cut their combined annual capex by 14% over the next three years. At the same time, consensus* estimates projected Weir's revenue to grow 19% over the same period. Go figure!
*data from Bloomberg   

Weir consensus revenue growth projections
from January 2014 as compared to current consensus
Source: Bloomberg
Weir consensus EBITDA margin projections
from January 2014 as compared to current consensus
Source: Bloomberg

That was then 

Now I reckon the same bearish argument could be made for Atkins (ATK, mkt cap £1.4bn), the design, engineering and project management consultancy business.

According to Bloomberg estimates (BBE), Atkin's top 12 quoted customers^ account for 16% of its revenue. Further, BBE suggest that these customers are set to cut their combined annual capex each year by 15% in 2015, 4% in 2016 and a further 2% in 2017. This is a total capex cut of 21% through to 2017 from 2014 levels.

By comparison, BBE forecasts that Atkins is set to grow its revenues by 5%, 3% and 4% in 2016, 2017 and 2018 respectively (Atkins has a March year end). This is total growth of 13% through to 2018 (March year end) from 2015 levels.

Further, consensus expects Atkin's EBITDA margin to rapidly increase from 7.7% in 2014, to 9.4% by 2018.

I find all this very unlikely. So I sold short a few Atkins.

^Bloomberg estimate of Atkin's revenue by customer - Airbus (4.3%), Apache (2.0%), Statoil (2.0%), CNOOC (1.6%), Chevron (1.4%), ENI (1.3%), Boeing (0.9%), Royal Dutch (0.9%), Rolls Royce (0.7%), BP (0.6%), National Grid (0.4%), Alstom (0.2%)

Atkins consensus revenue growth and EBITDA margin forecasts
as compared to consensus capex plans by top 12^ (see above) quoted customers
Source: Bloomberg

Incidentally, Atkins trades on a forward P/E of 12.5x and a forward EV/EBITDA rating of 6.9x when as one can see, historically the shares have traded somewhat lower.

Atkins forward P/E and EV/EBITDA rating
Source: Bloomberg
Atkins share price
Source: Bloomberg

And another thing

As night follows day ... I found the following charts reasonably compelling.

Atkins share price as compared to Apache Corp (2.0% of ATK revenue*)
Source: Bloomberg, *Bloomberg SPLC 
Atkins share price as compared to Statoil (2.0% of ATK revenue*)
Source: Bloomberg, *Bloomberg SPLC
Atkins share price as compared to Chevron (1.4% of ATK revenue*)
Source: Bloomberg, *Bloomberg SPLC
Atkins share price as compared to ENI (1.3% of ATK revenue*)
Source: Bloomberg, *Bloomberg SPLC
Atkins share price as compared to Rolls Royce (0.7% of revenue*)
Source: Bloomberg, *Bloomberg SPLC
I'm short Atkins.

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

2 comments:

  1. I like to visit your site a couple times a week for new thoughts.  I was wondering if you have any other topics you write about?   insurance management system

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  2. Very interesting findings about ATK's revenues structure. However, I think that even if the troubles will appear, they will be only temporary. I have written an aritcle about this company recently and I think, that it good investment in the long run. I don't think, that is overvalued either.

    A link to by article about ATK: http://bargainvalue.co.uk/ws-atkins-stock-analysis/

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