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Oil services play may have bottomed out after long period of underperformance

A series of disposals may stave off the need for the big rights issue many investors fear will happen at energy services business Amec Foster Wheeler (AMFW).

Buy at 449.2p ahead of an investor day on 21 March which may help win over the market as Amec will be able to properly explain its business opportunities and current state of play.

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Amec needs to win back investor support because its shares have underperformed its peers in the oil services sector. In the last six months its shares are down more than 20% against a 1.4% advance for the FTSE 350 Oil Equipment, Services & Distribution sub-sector.

Warning hit share price hard

Much of the damage was caused by a big profit warning in October 2016. As a result, the company has a much lower equity valuation than its peer group as the market is effectively pricing in a discount around trading issues and balance sheet strength.

It trades on a 2018 price-to-earnings ratio of 7.4 times against peers which trade on multiples of between 10 times and 16 times next year’s earnings. It also offers a prospective dividend yield of nearly 5%.

A big black mark against the stock has been the company’s heavy debt burden.

The company leveraged up the balance sheet to acquire US rival Foster Wheeler for $3.2bn in November 2014.

Canaccord Genuity estimates Amec hit a net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) ratio of 3.1 times a the end of 2016. That level of debt-to-earnings would be beyond the comfort zone for many companies.

The broker also believes the sale of most of its Global Power Group unit as well as infrastructure assets and a specialist project services consultancy in Australia (announced 2 Mar) plus its nuclear business, currently advertised for sale, could bring in between £480m and £520m combined.

This windfall would help to reduce net debt to EBITDA to a more manageable 1.6 times by 2018, based on Canaccord’s estimates.

Although these sales would dilute earnings in the short-term, they should also reduce interest costs and the need for a fundraising.

Yield and value attractions 'to come to the fore'

Canaccord analyst Alex Brooks, who has a ‘buy’ recommendation on the stock and 600p price target says: ‘Amec Foster Wheeler has been a challenging stock to be a buyer of, with repeated profit warnings and a stressed capital structure, and likely to see the fourth successive year of year-on-year earnings falls in 2017.

‘However, we believe much of this is now behind the company, and its yield and valuation attraction should start to come to the fore.’

At current levels the company looks attractive, as long as it can avoid a big equity issue. Nonetheless, investors should still treat this as a high risk stock.

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