Amec profits up due to services

Amec made £18 million of its total £26 million operating profit in the first half of 1998 from services, far outshining the £5 million contribution from Amec's capital projects - the group dubbed the latter as being "unacceptable".

Since taking over as chief executive three years ago, Peter Mason has reshaped Amec's business, dropping loss-making activities and improving the certainty of its income stream by increasing the emphasis on maintenance work.

Latest interim results for the six months to 30 June, announced last week, showed turnover ahead at £1.4 billion (£1.3 billion) with pre-tax profit at £22 million (40 per cent higher than the previous figure of £16 million when the £24 million exceptional profit on the sale of Egypt Gas is stripped out). Mason said the outlook for rest of the year was "favourable".

His new definition of Amec's business streams are capital projects, services and housing/investment projects. The latter contributed £3 million to the £26 million operating profit.

Capital projects work in Germany saw losses cut back from earlier figures while in America, Amec's Morse Diesel business broke even on a turnover of £200 million. "We should be doing better in the USA as the market is exceptionally strong," said Mason." Morse is to develop a civils capability to cash in on the American government's multi-billion surge in infrastructure spend.

Amec's services activity divides into oil and gas, rail, infrastructure and Spie Trindel. "Our oil and gas capability won't be affected by the drop in oil prices," said Mason, "as 75 per cent of our workload is now related to maintenance services."

Amec's rail service business is based on its three RT1A "dowry" contracts which will be rebid in the near future, the first expiry date being October 1998. Amec wants to hang on to its existing workload while winning contracts currently held by rival contractors. "We are targeting to gain rail maintenance market share," said Mason.

Amec is part of Tuberail, the consortium formed with Brown & Root and Alstom to bid for the £7 billion upgrade of the London Underground. Tuberail is one of the names on the shortlist to be called in for consultation on how the work should be shaped.

With First Engineering making 10 per cent margins and reportedly being up for sale, might Amec be interested in buying the Scottish track renewal business? No, said Mason. "It is too expensive," he said. He also questioned the sustainability of First Engineering's turnover. Fairclough Homes is making a 15 per cent return on capital employed but that still may not stop Amec hoisting a "For Sale" sign over it in the long-term should Amec need extra capital to invest in its PFI equity stakes - an area offering an even more rewarding return on capital.

Amec is keen to invest equity in its PFI schemes, regarding the income stream this would generate as being important for the group's future stability.

Mason said that Amec has a £30 million war chest ready to pour into PFI equity, where he anticipates returns well in excess of 15 per cent. Should returns prove to be that high, prompting Amec to search for additional funds, then the position of Fairclough Homes within the group would come under question. Asked if a sale might be considered, Mason replied: "It must be possible in the long-term."