We believe leading engineering and construction group nmcn will benefit from sustainable earnings growth, supported by environmental investment and a trend among customers seeking more stable, long-term partners after Carillion’s failure. The cash-positive group’s strategy prioritises margins, cash generation and risk management to prevent recurrence of loss-making legacy contracts. Based on what we believe to be conservative estimates, the shares are trading on a FY 2019E P/E of 10.3x and yield of 3.5%.
nmcn, which changed its name from North Midland Construction last year, sources 72% of its revenue from its Water segment. Built Environment serves sectors including high spending roads, telecoms, student housing and health sectors. Longerterm the aim is for a more even earnings and revenue balance between the two segments.
nmcn’s largest sector, Water, has been driven by six consecutive investment programmes lasting five years. The next, ‘AMP 7’, is budgeted at £50bn, starting in 2020, a £6bn increase, mainly in ‘frameworks’ with suppliers.
After a series of lossmaking legacy contracts, stronger risk management controls were imposed, followed by a six-point strategy in 2016 under incoming Chief Executive John Homer further targeting margins and cash generation. nmcn’s net cash of £28m could benefit from a trend among clients selecting financially sound contractors, following the collapse of Carillion and financial troubles at Interserve and Kier.
Our possibly conservative estimates assume the benefits of growing demand and operational improvements feeding through gradually over our three-year forecast period. In the 16 May AGM statement, chairman Robert Moyle stated: “prospects for sustainable growth are very positive across all the chosen markets”, with focus on risk management and contract selection.
The shares have fallen 27% from a 12-month high of 785p and are trading on a FY 2019E P/E of 10.3x, falling to 9.8x in FY 2020E. The shares are yielding 3.5%, based on FY 2019E.
