logo-loader

Going nuclear at Redhall Group

Last updated: 18:46 14 Feb 2009 AEDT, First published: 19:46 14 Feb 2009 AEDT

no_picture_pai

Nuclear decommissioning is becoming a major government priority and could possibly be followed by a hefty new-build program, which means the sums spent on nuclear power in coming years could be huge.



As can be seen from the above chart of the FTSE 100 the index incurred resistance at around 4300, which coincides with the 50 day exponential moving average (EMA) and the previous short term high.

A quarterly inflation report released this week from the Bank of England spooked the market, as it showed that the speed of deterioration is accelerating and that the economy may shrink by 4% towards the middle of this year.

Governor Mervyn King signalled that interest rates would head even lower to prevent what is already the deepest recession since the early 1980’s. He also said the bank would start buying commercial paper immediately and were most likely to move on to full-scale quantitive easing, which involves buying securities and printing new money to pay for them.

It is hard to evaluate whether the majority of this bad news is already priced into the market at these depressed levels and how optimistically investors will perceive the increasingly proactive response by the various authorities.

Technical analysis of the above chart shows that investors are becoming increasingly confident that we have already seen the lows on the FTSE 100. The series of higher lows that have been in place since October suggests that a medium term upward trend has been formed. The relative strength index (RSI) has also remained relatively strong in light of the recent falls, which indicates that the momentum behind the selling is diminishing.

In summary, I believe that 4000 offers significant support for the FTSE and that close to this represents a good buying opportunity. Resistance is still seen coming from the 50 day EMA at around 4300, but any green shoots of recovery could enable the index to re-test 4600.

As we could be nearing a base for global indices I have been focusing on the sectors that have historically outperformed the market within the first year of a bull market. Support services have beaten the market in the first year in seven of the last nine bull markets and have outpaced the index by an average of 8.5% on these occasions.

A stock I am particularly interested in within this sector is Redhall (epic: RHL), which is a world leading specialist engineering support company. Redhall is listed on the alternative investment market (AIM) in the defensive and growing division of nuclear engineering. This is a niche market, with high barriers to entry due to the tough safety and security standards required.

Nuclear decommissioning is becoming a major government priority and could possibly be followed by a hefty new-build program, which means the sums spent on nuclear power in coming years could be huge.

At a company AGM on the 4th February David Jackson, Executive Chairman, stated that Redhall had experienced a strong start to trading in the first quarter of 2009, with profit seen ahead of managements expectations.

The group floated in April 2006 at 61.5p and has been regarded as a solid defensive play, in a growing niche market, with plenty of cash, robust balance sheet and a strong forward order book.

However, on the 23rd January 2009 the group released a trading statement highlighting that Chieftain, which is a wholly owned subsidiary of Redhall had lost a contract with Sea Dragon Offshore worth £9 million. The loss would cost the group £1 million of operating profit in 2009 and caused the shares to fall around 35% within a few days.

Management remain confident that various efforts can be taken to mitigate the effects of this contract termination and with contracted orders for 2008/2009 already in excess of £75 million there are several other opportunities in the pipeline for replacement work. Furthermore, initial discussions with Sea Dragon Offshore have indicated that they are prepared to make certain reparations should the contract not be replaced.

Redhall remains well positioned in defensive and regulated markets, with attractive growth drivers. The loss of Sea Dragon’s contract should not detract away from the business and even after adjusting the earnings forecasts I believe they still offer extremely good value at these levels.


As can be seen from the above chart of Redhall the shares floated at 61.5p and reached a high of 318p in June 2008, before the weakness in global equity markets took its toll and the shares drifted lower. They recovered off the October 2008 lows of 174p up to 243p in January this year, before the loss of contract news sent them down 35% to 155p, where they appear to have found some support.

This puts the shares back at levels last seen in December 2006 and the company’s performance has grown significantly since then, with earnings per share rising around 200% in this period.

In light of our earlier analysis of the FSTE and David Jackson’s positive comments at the AGM, I believe the recent correction in the share price due to the loss of contract is overdone and on a forward earnings of around 8x the shares offer extremely good value at these levels.

At the time of writing the share price is 158p and my short-term opinion is positive. Near term targets are seen at 167.25p, 170.5p, and 182p, with a stop loss on the trade at 141p.

 

 

 

Mark Allen is Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Redhall. The material in this report has come from Fidessa, Share Scope and Redhall’s corporate website.  



 

Australian Strategic Materials signs US$600 million LoI

Rowena Smith, CEO and managing director of Australian Strategic Materials Ltd (ASX:ASM, OTC:ASMMF), joins Jonathan Jackson in the Proactive studio to discuss the company’ s Dubbo Project, in Central West New South Wales. This project aims to extract and process critical minerals and rare earth...

5 hours, 29 minutes ago