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Buy Kentz at 127.5p Background: In the biggest AIM IPO of the year so far in terms of funds raised the engineering and construction company Kentz (KENZ) joined the junior market on 5th February. At a placing at 115p it raised £66.7 million, with £18.8 million going to the company and the balance to selling shareholders. At the end of trading on the first day of dealing the shares closed at 124p valuing the business at £144.3 million. Operations: Kentz is an engineering contractor which provides mechanical, electrical, controls and instrumentation engineering, construction and management services to a range of sectors with the oil and gas, petrochemicals and mining and metals industries being the most important, collectively providing 99% of revenues in the first half of the last financial year. The company has a range of blue-chip clients including Shell, ExxonMobil and Anglo Coal, amongst others. Kentz is organised into three divisions. EPC (engineering, procurement and construction), Construction and Technical Support Services. In each area the company provides project management skills across the life of projects from design to shutdown. Kentz was founded in 1919 in Ireland but has grown its operations significantly since its early days and now has activities around the world in the Middle East, Sub Saharan Africa, South East Asia, North America, Europe and Australia, amongst others. At the end of 2007 the company had over 8,500 people working for it in both a permanent and contracted capacity. Business Development: To achieve its goal of being recognised globally as the 'specialist service provider of choice' Kentz will follow a number of strategies. The company has a history of winning repeat business and through building and maintaining good relationships with its clients it intends to provide a range of services throughout the lifecycle of projects, rather than just one. Kentz will focus its activities on regions with major hydrocarbon reserves where significant capital and operational expenditures are expected. A particular focus is currently being paid to the Middle East where a number of oil and gas projects are currently being developed. Kentz is proud of its track record in health and safety and will continue to advance initiatives to maintain and improve its standards. The company's strategy is mainly focused on organic growth but it will also consider complimentary acquisitions. Up to £6.3 million of the placing proceeds will be used in this respect. The rest of the proceeds will be used for working capital purposes, for an investment in a fabrication facility in South Africa, for the acquisition of an engineering services company and for the part acquisition of an Australian engineering services business. Business Development: China Eastsea intends to use its client base, expertise, management and operational strength in order to increase revenues and profits through mergers, acquisitions and organic growth. As well as maintaining its leading position in the petroleum and government sectors it also intends to expand in other markets such as telecoms and power. Specifically, the group will focus on expansion in Eastern China.. Management: CEO, Hugh O'Donnell, who joined the group in 1991, is a professional engineer registered with the Board of Engineers, South Africa. Chief Financial Officer, Ed Power, has been with the company in some capacity since 1990. Before joining Kentz he worked with the US owned multinationals including Measurex and Hasbro, in Ireland, US, Germany and Spain. Executive Director, Noel Kelly, joined the group in 1977 after 10 years with the Electricity Supply Board of Ireland building power stations. He been instrumental in the group's international growth over the last 30 years through the various positions he has held during including Proposals Manager, Project Manager, General Manager, Sales Director and Executive Director. There are five Non-Executive Directors on the board; Tan Sri Razali, Hassan Abas, Dave Beldotti, Hans Kraus and Brendan Lyons. Assessment: In the year to 31st December 2006 Kentz made revenues of $370 million, up 18%, with pre-tax profits rising by a massive 239% to $25 million. In the six month period to 30th June 2007 revenues grew by 61% to $244.5 million and pre-tax profits rose by 70% to $8.9 million. Historically, the company has seen higher revenues in the second half of the year, although going forward this is expected to smooth out as more projects are taken on. With a backlog of work valued at $584 million at the end of October 2007 and 60% of this expected to be recognised in 2008, the company has very strong earnings visibility. Added to this, the company has identified a number of potential prospects, some of which it believes could be worth over $100 million to the successful bidder. At the end of June 2007 there was $112 million of cash in the bank with long term liabilities of $5.2 million, giving a very strong net cash balance of around $107 million. The company is also strongly cash generative, with net cash from operating activities amounting to $63.1 million over the first half of 2007, a higher figure than in the whole of 2006. With levels of capital expenditure in the oil and gas industry remaining strong Kentz expects to continue to grow through 2008 and beyond. The company has said that it continued to trade in line with expectations in the second half of the 2007 financial year. We think that one of the major risks is the fact that a small number of clients provide the company with a significant proportion of revenues. From January 2004 to June 2007 the company's ten biggest customers accounted for around 59% of revenues. The loss of any of these could materially affect the company. Kentz also has a large exposure to the oil and gas sector, although with oil and gas prices set to remain strong for the forseeable future we believe that the industry will continue to be an attractive area for growth. At 127.5p the shares trade on a historic (2006) multiple of 12.3 times earnings. Considering that the company continued to grow strongly in the first half of 2007 and traded in line with expectations in the second we think that at the current price the shares look very cheap. Add to that the fact that the company is operating in a growing market, is extremely cash generative and (presuming very conservatively that cash balances and debt have remained the same since June 2007) the company has over £50 million of net cash plus the funds from the IPO. Strip out the net cash and the shares trade on a single figure multiple. This is the best IPO of the year that we have seen so far. The shares are a buy. Key Data:
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