Amec will dig deep to double earnings in next five years

The group has ambitious targets and the sectors on which it is focusing will be growth businesses over the next decade.

AMEC

810p

Questor says BUY

On Friday, Amec revealed its strategy for the next five years.

The group will continue its transformation into a specialist energy and mining services company, with
an increased focus on the sub-sea engineering, underground mining, renewables and water sectors.

Management aims to more than double earnings per share by 2015 to 100p, compared with the current 2009 consensus forecast of 46.4p. This implies an annual growth in earnings over the next five years of about 13pc.

Margins of 8.5pc are on track to be delivered in 2010 and the group plans to progressively increase its dividend.

There are four pillars to the group's new strategy. The group plans to achieve annual revenue growth of 8pc by entering new markets such as Brazil.

It will also continue to raise its margins, although the group is unlikely to see the level of improvement it has recorded over the last three years. The company also believes that it can extract further tax efficiencies from its structure. Finally, the group will grow by acquisition, using its £700m cash pile.

The shares are trading on a December 2009 earnings multiple of 17.2, but about a quarter of the group's valuation is underpinned by cash.

The dividend yield is 2.1pc, so there is plenty of scope for the payout to be increased. Amec said that it would not make any special payments to shareholders from its cash balances next year, but there is the possibility of this in the future.

The strategy looks sensible. The sectors on which the group is focusing will be growth businesses over the next decade – with deepwater technical expertise and mining engineering skills in demand.

The company's balance sheet is strong enough to support its plans, but the targets are undoubtedly ambitious. However, the strategy is now clear.

The shares were recommended on January 8 at 531½p and they are up 52pc compared with a market up 17pc.

The stance remains buy.

Petropavlovsk

£12.62

Questor says BUY

Capping an extraordinary year for the group, FTSE is expected to confirm next week that Russian gold producer Petropavlovsk (formerly Peter Hambro Mining) is to enter the FTSE 100.

At the close on Wednesday, the company's market capitalisation needs to be greater than the 90th largest company in the index.

This looks likely to be achieved and it is expected that the group will replace Thomas Cook in the blue-chip index.

The group is on track to produce 500,000 oz of gold this year – more than FTSE 100 peer Randgold Resources. The group's expansion plans will grow this to 1m oz by 2012. The company is a low-cost producer. In the first half of this year the cash cost for each ounce of gold it produced was $254.

The company also has iron ore assets in the Amur Region of Russia close to the Chinese border, which were brought back into the group when it repurchased its Aricom spin-off. Petropavlovsk is developing this asset with funding from Chinese group Xuan Yuan Industrial Development, and the potential value of this aspect of its business appears not to be fully accounted for in the group's valuation.

The shares were tipped as a buy on July 21 at 626.2p and are up 102pc compared with a market up 18pc.

The stance remains buy ahead of the index reshuffle on Wednesday.