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Panmure said that while the sub-sector is not completely immune to a global economic downturn, diversification by market and geography is key with an interesting consolidation play in place at the moment.
The engineering consultants have not escaped concerns that a slowdown is upon us, said Panmure, with valuations at a five-year low, or 50 percent off peak multiples.
The broker said it believes this provides an opportunity for investors as most business models are sufficiently diversified to cope, and consolidation should continue as balance sheets are strong.
The recent bid for White Young Green Plc underlines the value that exists, especially at the small-cap end of the market, it added.
The broker said that while it believes this sub-sector has a lower risk profile than many other areas of the Support Services sector, Engineering Consultants have not been immune to severe global economic downturns in the past.
It said the key risk factors over the next 12 months include sentiment from other areas such as housebuilding, a severe recession impacting both the public and private sectors, client budgets and/or a change of policy/ strategy/asset cycle of how some public spending is deployed, staff shortages and execution risk once M&A activity picks up pace again.
The broker has cut its target prices across the board, reflecting higher potential of a slowdown in some end-markets over the next 1224 months coupled with lower risk appetites from investors.
Its key pick is WSP Group Plc, as it believes the company is a fundamentally better business than some of its small-cap peers despite being valued in that category.
It has downgraded Hyder in light of the question marks over its strategic direction, while RPS Group Plc remains its key 'sell' idea on valuation grounds. With its high local authority exposure and premium valuation it now advises taking profits in Mouchel.
Target prices cuts are as follows: WSP, to 571 pence, from 675; WS Atkins Plc, 'buy', to 1,120, from 1,320; White Young Green, 'buy', to 352, from 420; Scott Wilson Group Plc, 'buy', to 224, from 280; Hyder, to 349, from 462; Mouchel, to 365, from 500; RPS, to 258, from 274.
brian.gorman@thomsonreuters.com btg/jfr
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