TIPS

Buy Mount Engineering at 76p
Says Tom Winnifrith of t1ps.com - 08/04/01

AIM listed Mount Engineering is a company run by reassuring grey hairs
It operates in a growing if delightfully unsexy sector
It has minimal borrowings and is generating pots of cash.
One day it will be snapped up by a major.
But on fundamentals it is a snip at 76p
The stance is buy with a limit buying price of 90p and a one year target of 131p

I actually tipped this a couple of months ago on t1ps at 70p. The stockmarket has conked out a bit but Mount has gone up. I expect more of the same. My original tip (with prices and ratios amended) is below:

Tom Winnifrith

I had lunch with the very hands on non-exec chairman of Mount Engineering a few weeks ago .Colin Ainger is a vastly experienced chap but a sprightly fellow who is, as I write, in the Windies playing cricket for Berkshire Over 50s. He is shortly to contemplate a move to the over 60s. His team at Mount is steeped in experience, caution and a simple determination to deliver shareholder value. No glamour, no risks just delivery. At some stage Mount will get taken over by a larger player in its sector - its market cap c £18.5 million today - but until then it will carry on delivering double digit earnings growth year on year. On January 29th it released a trading statement saying it would beat forecasts for 2007 and I reckon it will carry on doing much of the same. Under promise, overt deliver that's the Mount game. That will lead to a steady re-rating and I reckon that in 12 months time a (then) historic PEG of 0.8 will see the shares trading at c131p. The stock is a buy at 76p with a 90p limit buying price.

The Business

I will not go into details here as it is all pretty technical stuff. The company was formed as a result of three corporate deals which have brought together three companies all engaged in producing high margin oilfield equipment products. If you can speak for two minutes without hesitation, deviation or repetition on what exactly a "thread adaptor for use in ex-certified hazardous areas" is well good on you. Essentially its products enhance the safety of hydrocarbon production and demand is driven by two factors:

a) In the good old days Lord Brown of BP could get his staff to support his boyfriend's business and could run refineries in such a way that they ended up blowing up and killing workers. The times they are a changing and oil companies must spend more and more on ensuring all their operations are safe. So there is a legislative driver.

b) In case you had not noticed, the oil price is at near record highs. It may not stay at c$100 but my guess is that it will stay at the sort of level $60 plus at which more and more hitherto marginal fields come onstream. That means more work for Mount.

Financials

In the year just ended, calendar 2007, I reckon that Mount's sales on a proforma basis (that is assuming all parts of the business had been in for a full year) would be c£11 million, pre-tax profits £2.5 million and earnings c 6.8p. The headline pre-tax and earnings numbers should be c £1.3 million and 5p. Now for the current year I expect sales to move ahead to £11.5 million, pre-tax profits to hit £2.85 million and earnings to hit 8.2p - that should fund a 2.5p payout. In terms of the balance sheet, net debt at the end of 2007 was c£1 million and that should be more than cleared by the end of 2008.

The company could I reckon easily borrow up to £10 million in order to bolt-on additional businesses but Ainger and his team are cautious. They will not over-gear and would - I suspect - use some paper to fund any purchases. There will be deals but they will be negotiated toughly and I have faith that they would enhance earnings. At some stage Mount will reach the size where one of the larger firms in this sector makes a move. We are not there yet and I am not banking on it. But it will happen one day.

So what is the business worth on fundamentals? A lot more than 76p per share. Hell this is a growth stock heading rapidly towards net cash and the current year yield is a decent 3.3%! I would suggest that a current year PEG of 0.8 is far from demanding and that would imply a target price of 131p. I do not see the global economic slowdown hitting this business - Governments will push more and more on safety whatever happens and we need more oil. So there is good visibility of earnings. Mount is a buy at 76p with a 90p limit buying price and a one year target of 131p.

Key Data

EPIC: MOU
Market: AIM
Spread: 74p - 78p (5.4%)

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