History is repeating itself at Waterman

Patience, grasshopper

In his statement for the year to 30 June, civil engineering consultancy Waterman (WTM) chairman Rodger Fidgen reported an…

extreme and protracted downturn

…But the company’s middling F_Score of 5 out of 9 suggest it is, perhaps narrowly, avoiding the worst case scenarios. Even if we ignore exceptional items profitability slumped near 0%, but at least the company repaid some of its debt. Shareholders are not the only ones prepared to look beyond this year’s exceptional loss, HSBC, the company’s bank, agreed not to test the covenants on its loans, which, Waterman says were well within their limits at the end of June, on a non-exceptional basis.

Include exceptional costs (light blue line) in the profit figure and the company made a loss. Those costs, admirably documented in the first pages of the chairman’s report, were the value of work the company has little prospect of collecting from troubled clients in Ireland, Poland, Belgium and Romania, and the cost of unused office space in the UK and Ireland, which the company has vacated as it rationalises. With the continuing debt crisis in Europe, I guess these may not be the last of the write-offs.

Before the recession, though, Waterman was reasonably profitable, it had grown shareholder wealth (yellow and orange bars) at an annualised rate of just under 14% since 2001.

The problem is, turnarounds take longer in construction, perhaps because of the scale of the projects they work on and the amount of property left vacant after boom years. It must be filled before new construction projects are worth starting, particularly in hot spots like Ireland and Abu Dhabi. Last year, I backed bombed-out Waterman to rebuild itself. It’s is one of two companies building large public and private sector buildings in the Thrifty 30, the other is T Clarke. Waterman’s price is up very modestly, but Clarke’s is down.

Of the two, Waterman might emerge from recession quicker because it tends to get involved earlier. It plans and manages projects, while T Clarke is primarily an electrical and mechanical engineer. In a statement last week, Waterman talked of:

renewed confidence…

… Albeit,

With an element of caution due to challenges which still exist in the private and public sectors.

During the recession of 1992, Waterman cut its workforce in half and closed offices to stay afloat. History is repeating itself as it makes redundancies and offloads property leases, saving rent and wages, and refocuses on its most important markets, The UK, Australia, the Middle East, and the Commonwealth of Independent States, from which it will service other territories.

But the company says it has retained skills by sacrificing short-term profitability (green lines), which puts Waterman in a good position to recover if demand rises as staff and property costs fall over the next few years. Investors may be unfairly penalising the company by shunning its shares while profits are only temporarily depressed.

Peter Gyllenhammar isn’t shunning the shares. He appears for the first time on Waterman’s list of substantial shareholders as the most substantial of all, owning 17% of the company. Gyllenhammar likes to take big stakes in small troubled companies, he also owns shares in Thrifty 30 member Mallett. It’s a vote for Waterman, although Gyllenhammar confesses to “bad analysis” in the past…

…And too much hip shooting.

Also mildly reassuring is the purchase of nearly 27,000 shares by chief executive Nicholas Taylor last month. It’s not a huge investment, just over £12,000, but it’s another vote, and this time from an insider.

To be honest, the actions of other investors are a side-show. Waterman’s weathered storms like this one before, it seems to be staying afloat now and since the shares look cheap, they cost only 5 times average earnings, I’m not inclined to eject them.

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Thrifty 30 updates

The Thrifty 30 portfolio (updated 1 Nov)

The wife of a non-exec director at fastenings manufacturer Trifast buys for the second time in a week.

Educational supplier RM publishes its full year results, at first glance it all looks good. Its chief financial officer buys 25,000 shares, his first.

Backing bombed-out Waterman to rebuild again

Not the best company, but…

"The patterns of boom and recession in the British economy and the post war history of commercial property developers have shaped the Waterman Group to a considerable degree."

Our History – Waterman

Waterman’s history is pretty fascinating. Founded by Harold-Waterman in 1952, the engineering consultancy helped rebuild Britain after the Second World War and develop the City of London in the 1970’s and 1980’s. Then it clung on to the coattails of globalisation going wherever, it seems, there’s an office complex, station, motorway or hospital construction project to manage, design or plan.

Cleared bomb sites, Elephant & Castle. Source: Ingenuity and Engineering: The waterman Story [pdf].

But as property prices collapse in recession, building projects are cancelled or delayed reducing the income and profitability of the engineers working on them. Waterman survived in 1992 by cutting its workforce in half and closing many of its offices. In 2009, it’s bust time again.

The pattern of boom and bust, may have shaped the company. It’s also shaped the share price (see chart), and, no doubt, etched itself into the minds of many investors.

At 40p, the share price values the company at just over £12m, yet it made sales of £122m in the year ending 30 June 2009. It made profits of nearly £3m even after £2.1m of restructuring and redundancy costs and a £2.8m provision against bad debts, money it’s owed but doesn’t expect to receive, and write offs, costs it no longer expects to recoup.

Bad debts and write-offs are a sign of crisis, but so far the company seems to be coping. Profitability is down, but Waterman (WTM) is profitable and its shares are very, very, cheap. They cost just four times its average earnings over the last ten years.

Perhaps investors are fearful it will suffer the fate of White Young Green, another consultancy which, unable to pay its debt, must swap it for equity. It’s also planning to give part of the company to employees to stop them leaving. Existing shareholders will end up owning just 15%.

Perhaps they think the provisions in 2009’s results are just the beginning, and many more projects will falter as clients get into financial difficulty. The provisions Waterman made in January, though,  are actually £1.2m less than the maximum of £4m the company forecast in a statement in May.

I think Waterman is in better shape than its paltry stockmarket valuation indicates. Unlike White Young Green, it has relative modest debt. In June it had reduced its long-term borrowings from about £15m to about £12m or 12% of total assets, and interest was covered three times by operating profit.

The worry is that even that much debt is too much and expanding overseas hasn’t given it the diversification it hoped would insulate it from the busts of its past. In 1992 it had no debt, and so far it’s projects in Ireland, Russia and UAE that are causing the trouble.

Still, at this price, I think Waterman is a good bet. From the perspective of its past, busts are normal, yet investors have panicked. This table comparing Waterman’s valuation and financial strength with some of its peers sums up the situation:

RPS looks like the strongest company in the group. Like Waterman it has an  F_Score of six out of nine, but it owns more than twice what it owes (Shareholders’ equity is 68% of total assets, therefore liabilities are only 32%). Investors are paying through the nose for RPS though. At 23 times long-term earnings, the speculation is all in the price.

White Young Green is, unsurprisingly, dirt cheap, but it completely fails my tests for financial strength.

Only Waterman appears cheap and financially sound. It’s probably not the best company, but it’s the most underrated and should be the best investment.

It’s so cheap, I feel  uncomfortable adding it to the Thrifty 30 model portfolio. To go against the crowd this defiantly will either look heroic or stupid in a few years time but contrarian investments are by nature uncomfortable so I’m adding Waterman at Friday’s close of 40.5p, a buy price I confirmed with my broker this morning.

I checked because Waterman has a very low exchange market size (£410) suggesting it might be difficult to buy quantities even as small as £1,000. Fortunately, it’s not, but its apparent illiquidity could still put off larger investors, another reason for the company’s unpopularity.

First transaction: 9 September 2009
Valuation date: 6 November 2009
Cost includes £10 broker fee and £5 stamp duty
Cash earns no interest
Dividends and sale proceeds are credited to the cash balance

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Goldman, forever blowing bubbles

Will they ever learn? Despite the catastrophe of the original Nifty 50, Goldman Sachs are touting not one, but two, new Nifty 50s, this time in BRIC countries.

John Mulligan likens UK gilts to Ponzi schemes. Verdict: they’re not as safe as houses.

…And when he’s not bashing gilts, Mulligan’s repurposing his successful STAR stock picking formula, to international companies.

Saj Karsan explains why Buffett ’aint no ordinary value investor, and cautions us not to ape him.

Eugene Fama, father of the Efficient Markets Hypothesis, puts up a defence of the model that many people hold responsible for the financial crisis. How can EMH be responsible, when the majority of investors disbelieve it?

Easily, says Justin Fox, author of The Myth of the Rational Market, policymakers believed in efficient markets, and the academics who constructed the hypothesis didn’t disabuse them.

Here’s an anomaly: According to Dylan Grice’s BAAH index, sectors covered by many analysts herding together tend to do worse than sectors covered by few. Sheep.

Buttonwood’s nervous about China, bureaucrats don’t allocate capital better than markets.