Broker snap: Atkins reducing UK dependence

The threat of earnings downgrades has been hanging over WS Atkins but Numis thinks that over the medium term the engineering contractor's growth prospects make the shares worth buying."Overshadowing the shares has been downgrade concerns - whether through UK Road spend pressures, the quality of earnings in the PBSJ acquisition or a higher pension cash payment," notes Numis analyst Francesca Raleigh.However, the broker is comforted that the group is becoming less dependent on the rail and roads business in the UK, which could see its contribution to earnings before interest, tax and amortisation (EBITA) slide to 13% of the group's total. Meanwhile, the Atkins board is also making reassuring noises about the pension situation, indicating that it does not foresee a rise in cash contributions."In our view, the rating does not reflect the medium term growth prospects: a) circa 50% overseas - where there are good infrastructure spend prospects in the USA, Middle East and Globally in Energy; and b) The margin upside at PBSJ (each 1% adds £4.5m/c4.5% to profit before tax ) that will enable the shares to be re-rated to 11-12x" earnings per share,At present, based in Numis's projected earnings for the year to March 2012, the shares are trading on an earnings multiple of about 9.5, which the broker thinks is looking cheap for a stock that prior to the credit crunch shakeout was trading in the range of 12 to 16 in the years following the group's Metronet (London Underground consortium) stumble. The projected dividend yield of 4.1% for the current financial year should also support the shares. "This is a gentle re-rating situation and we would recommend starting to tuck these away as the news flow is likely to improve during the year and the stock will be seen as a US infrastructure and Global Energy play," Raleigh concludes. The broker's target price of 882p equates to around 12 times projected earnings per share for the year to March 2012 or 11 times projected earnings for the year to March 2013.