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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