LON:AUK | Aukett Swanke (AUK) – Value Trap Or Bid Target?

7th Jun '17 by drvodkaquickstep

9 comments 6701 reads

Aukett Swanke – Value Trap or Bid Target?

With news of the acquisition of Waterman (LON:WTM) by CTI Engineering (Japan) still fresh in investor’s minds; this being the latest in an exhaustive list of M&A activity in this sector over the last 10 years, I am being increasingly drawn to the potential value of AIM micro-tiddler Aukett Swanke (LON:AUK).

As noted above, recent M&A in the construction consultancy space includes:
- Atkins – acquired by SNC Lavelin (April 2017)
- Mouchel – acquired by WSP (October 2016)
- Sweett Group – acquired by Currie & Brown (Jun 2016)
- BDP – acquired by Nippon Koei (March 2016)
- 360 Architecture – acquired by HOK (Jan 2015)
- Hyder – acquired by Arcadis (Sep 2014)
- Parsons Brinkerhoff – acquired by WSP (Sep 2014)

N+1 Singer recently included a useful table of comparable M&A transaction in this sector in their recent ‘Corporate’ Note for Driver Group. This highlighted that valuations of M&A transactions are typically in the order of 6-10 EV/EBITDA and correlate with my own database of deals over recent years which shows 0.7 x Sales as a useful benchmark.

My own analysis suggests Aukett Swanke (LON:AUK) could be worth between £8-18m mcap compared to the current <£4m. That’s attractive to me on a risk / reward basis.

There are lots of reasons not to like Aukett Swanke (LON:AUK).

- Serial history of disappointing / lacklustre / lumpy trading
- Operations spread across volatile / challenging geographies incl. Middle East & Russia.
- Management not Shareholder friendly
- Micro-cap
- Results due later this month will be poor.
- Risk of delisting
- Typically low margin 'design' work compared to more specialist consultancy work undertaken by Waterman (LON:WTM), Driver (LON:DRV) and WYG (LON:WYG) etc

All of that said, they are a reputable Architect, management own a lot of shares, they have recently rationalised their London office space and are…

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aflash

7th Jun '17

Bought on 12 May but then sold when it bounced up to 23 May. 19 June interims critical but price movement before then should give us an idea.

cig

8th Jun '17

I hold but don´t expect a bid, architects don't seem to fit in large groups like engineering consultants do. It's by nature a fragmented industry -- the big shops seem to be mainly personality-driven private companies, for whom Aukett Swanke (LON:AUK) would not make an interesting addition.

I hold but don´t expect a bid. It's not the same as engineering consultants, where swallowing smaller players makes more sense for large groups.

drvodkaquickstep

cig.

Not sure I agree with you on that one. The is a vast history of M&A in the architectural space as there is with Engineering Consultants - a few that I am aware other than BDP / HOK noted above include:

Holmes Wood bought by Benoy in Dec 2016
RHWL bought be AEDAS in Jan 2015
GMW bought by Scott Brownrigg in Aug 2015
Llewelyn Davies bought by HLM in May 2013
Nightingale Associates bought by IBI in June 2010
Perkins + Will - huge number of acquisitions over recent years although a lot US based
Archial bought by Ingenium in Sep 2010

The list goes on and on.

Sometimes the acquirer just wants a foothold in the UK market and/or to increase headcount / capacity / scale to their current operations. Whether any find Aukett Swanke (LON:AUK) suitably attractive only time will tell.

15th Jun '17

Pleasing to see Aukett's 'Veretec' design studio win 'Executive Architect of the Year' by the AJ for the second year in a row.

https://www.architectsjournal.co.uk/news/aj100-executive-architect-of-the-year-awarded-to-veretec/10020747.article?blocktitle=AJ100-AWARDS&contentID=18689

glass7

Bought on May 18th, still holding it

5th Jul '17

Being a big fan of Phil Fisher's "scuttlebutt" technique and generally keeping eyes and ears to the ground, I was interested to read the following snippets concerning their Order Book and general outlook following recruitment of a new Project Director:

http://www.aukettswanke.com/news/JasonBaggeDirector

UK Managing Director Luke Schuberth said: "We welcome Jason back to the team and to his creative talents adding yet more depth to our growing workload".

Aukett Swanke Group CEO Nicholas Thompson said: “We are entering a new era at Aukett Swanke...."

£5m market cap buys £20m of sales at Aukett and although margins need improvement, with the ongoing rationalisation of the business in the UK and UAE, I continue to like the risk / reward.

17th Nov '17

Further research over the last day or so reveals that the Directors of the company (along with former Directors / Employees) own at least 49% of the issued share capital. Including staff that own <1% each I would expect this to be well over 50%.

Of equal interest is that the average age of the (long standing) shareholders on the Register is 64; the majority of which are Directors and/or former Directors & Staff. The non-exec Chairman is 73 and having joined the Board in 2009 should be up for retirement at the AGM in March next year.

Whilst trying not to be ageist (!) this age demographic of the Board must be motivation for them to want to unlock their investment. With Sterling still weak (a benefit to a potential overseas bidder but also to Aukett given their increasing revenue stream denominated in AED / US$ - https://www.investegate.co.uk/aukett-swanke-group--auk-/rns/contract/201711140700023660W/) I will be keeping a close eye on events over the coming months.

9th Jan '18

So, investors in Aukett Swanke (LON:AUK) will hopefully catch sight of the Final Results for 2017 over the coming days. What can we expect?

Well the half year results were mediocre at best, showing a loss with prospects for the second half looking equally mixed; the CEO noting: "With many of our operations in a loss situation we will continue to focus on cost savings in the second half whilst ensuring that we retain the core skills required to deliver our services to clients in order to return the Group to profitability.

Whilst we believe we have reached the bottom of the cycle in the UK.....The UAE still represents our best opportunity for profitable growth in the second half and we will focus on that. Continental Europe should return a positive result in the second half. Overall we currently foresee a loss situation for the year pending a return to positive results for our Group".

So not exactly full of optimism, however, the Lesso Mall contract in Dubai announced in November 2017 is significant and could generate fees (my estimates only) of circa £5m - pretty significant given the Middle East share of turnover for 2016 was £7.4m. I understand the Group has an 'Unlimited Licence' with respect to Architect / Architect of Record services in the UAE and their increased scale (JR Harris + Shankland Cox) should provide them with increased opportunities for work compared to previous years.

Equally, in the UK their 'Executive Architect' studio (Veretec) appears to be picking up various new commissions as do Aukett Swanke themselves and from perusing the outlook statements of a number of privately held London / UK based architects over recent weeks / months it would seem that whilst the market is cautious (Brexit / Govt instability), forward order books are holding up well and its certainly not 2008/09 Armageddon.

With results for 2017 expected to show a loss, it would be nice to see 2018 delivering at least a maintained turnover of £18-20m and a margin of say 7% giving profits of circa £1.3m (EPS of 0.75p). That said the cyclically adjusted PE for the last 10 years is only around 0.4p EPS.

This is going to remain, by the very nature of its end markets, a lumpy business, however, the current valuation of circa £4m (2.5p / share) is very undemanding around multi-year lows.

I am hopeful that a new Chairman / Chairwoman will be announced with the results given the current NE Chairman has been with the business since July 2009 and that this may serve as a catalyst for the business to be sold to a larger peer. Maintaining a listing serves no purpose for Aukett Swanke (LON:AUK) and I anticipate the aging Board will want to realise their investment in the not too distant future.

I would be very surprised if any such corporate action did not provide investors at current prices with a very healthy premium. Long live optimism.....

Aukett Swanke (AUK) – Value Trap or Bid Target?

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Drvodkaquickstep

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