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Core Recommendations
Hunting (390p) Add to Buy
The Hunting share price has fallen some 21% since early January; we believe the stock is now oversold
and we move our recommendation from Add to Buy. Whilst there remains some uncertainty in the
short term over drilling activity levels, we continue to believe that supply side issues will result in
increasing levels of well drilling in the medium term, often to greater depths increasing the margin
available for Hunting. The business has £400m of cash post the Gibson disposal and Hunting will need
to reinvest these funds or pay out as a special dividend before the end of 09 to avoid potential
associated tax implications. The proprietary backed well construction and completion activities achieve
attractive margins and we believe the modest valuation for the core earnings relative to the cash also
makes Hunting an attractive bid target. The stock now trades on an 09 EV/EBITDA of c1.5x and
stripping out the cash leaves the underlying business trading on PE of c3.8x 09, well below the sector
average. Buy below 400p.
Ben Snow ben.snow@arden-partners.com 0117 905 8773
Ben Thefaut ben.thefaut@arden-partners.com 0117 905 8892
Petrofac (412p) Buy
Petrofac have recently been awarded their largest contract to date, a $2.3bn lump sum EPC contract
by ADCO in Abu Dhabi. The scope of this work is similar to previous projects and as such, we believe,
the risk profile has not materially changed. We estimate following this award earnings visibility
approaching 85% for 09 (assuming new contract reaches profit recognition threshold). The E&C
division maintains a M Eastern/N African focus, a healthy bidding pipeline in excess of $5bn (which
continues to grow). Energy Developments production arm offers potential upside should the oil price
turn (we assume $50 oil currently). Following the contract award we believe the stock has been further
de-risked and now estimate revenue visibility nearing 60% for 2010. Whilst the strong correlation to
the oil price is driving share price volatility short term, we note the current market contango on a 12
month view of $56. With $350m of own cash, acquisitions could enhance the growth profile and we
reiterate our Buy stance.
Ben Snow ben.snow@arden-partners.com 0117 905 8773
Ben Thefaut ben.thefaut@arden-partners.com 0117 905 8892
Ricardo (189p) Buy
The January 09 trading update highlights strong period for technical consultancy activities; strong
revenue growth for the UK business and a successful turnaround in the US is based on the group’s
technological lead in engine efficiency. Legislation on global emissions, high fuel prices and automotive
safety provide core drivers and leave the group positioned to progress as a major brand in providing
more energy efficient solutions. Whilst the group cannot be immune from global contraction of the
automotive sector, its technologies place the group at the heart of its customers future engine
programmes which, we believe, will prove to be non discretionary and a beneficiary of stimulus
packages for the auto sector. On a rating of 7.1x and a yield 6.1% June 09 earnings, we believe
Ricardo is moving firmly into value territory.
Ben Thefaut ben.thefaut@arden-partners.com 0117 905 8892
Spirax-Sarco (859p) switch into Rotork (689p)
Spirax is a quality business as proven by its track record with a 30 year dividend track record.
Currencies will also assist both translation and transaction. Nevertheless, the shares are fully
discounting this and the business is both cyclical and late cycle. Resilience in the shares leaves them
trading on a double digit PE which may be justified but now represents a premium to Rotork.
Rotork results are due out 3rd March. We believe these will indicate record order books driving growth
in H109. We view downstream oil and gas, water and power infrastructure markets as particularly
defensive reliant on the capital plans of cash rich NOCs/ IOCs aswell as public spend with governments
globally committing to infrastructure projects to counter the impacts of contracting consumer
economies. Rotork will benefit from an additional fillip from currencies (Arden estimate over £10m at
current rates) that leaves our assumption of £9m PBT upside in 09 to £83.8m appearing conservative.
With a cash rich balance sheet providing possibility of special dividends and a rating approaching single
digit, the shares appear excellent value below 700p.
David Larkam david.larkam@arden-partners.com 020 7398 1611
Ben Thefaut ben.thefaut@arden-partners.com 0117 9058892
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