How Contrarian investors cashed in on the hidden appeal of Waterman

Tuesday, May 09 2017 by
How Contrarian investors cashed in on the hidden appeal of Waterman

A takeover bid for the engineering consultancy Waterman saw the price of its shares leap today. At 140p-per-share, the agreed cash deal with Japan’s CTI Engineering represented an 85% premium on Waterman’s previous price.

While the deal is yet to be sealed (and there is always a risk it may fail), this development ought to be of interest to onlooking investors. That’s because it comes against the recent run of play for Waterman, whose shares have been generally out of favour and drifting for several months. It begs the question of whether this turn of events could have been predicted...

Since last summer, the market mood has been very much ‘risk on’ towards profitable, growing, small-caps like Waterman. Yet this micro-cap - valued at just £23 million before today’s price rise - failed to ride that wave despite having some appealing features.

Of course, it’s very easy to look for all the plus points after the unpredictable arrival of a takeover bid. But the fact is that for more than a year prior to last autumn, Waterman had one of the strongest combinations of high quality, appealing value and positive momentum in the market.

It was only when its momentum began to weaken last October that it slipped from what we call a Super Stock into classic Contrarian territory. It was still high quality and attractively valued - it was just that the market had got nervous about it.


A high quality micro cap on the cheap

Our small-cap specialists Graham and Paul have both written extensively about Waterman in the past. Overall, they’ve been upbeat about it. But part of the challenge in assessing this business is that it operates in a highly cyclical industry. Plus its small size makes it vulnerable to setbacks. This was arguably part of the reason why it has generally always looked cheap at first sight. Its sensitivity to problems means the market has been wary of bidding it too high.

In terms of balance sheet health, over the past 18 months Waterman has consistently scored well against the nine-point Piotroski F-Score - our ‘go to’ litmus test of financial improvement. And this has really underpinned its strong Quality Rank (the Quality component of Stockopedia’s StockRank).

Waterman is undeniably a low margin business. But importantly, the trends have…

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Waterman Group plc (Waterman) is a United Kingdom-based holding company that offers a range of engineering and environmental services. The Company, through its subsidiaries, is engaged in the provision of design services and advice in the fields of civil, structural, mechanical and electrical engineering together with environmental, and health and safety consultancy. Its segments include Property, and Infrastructure & Environment. The Property segment consists of the United Kingdom structures and building services consulting businesses, which are involved in development projects both in public and private sectors. In addition, this segment includes its overseas business in Australia, Ireland and Poland. The Infrastructure & Environment segment comprises Waterman's civil, transportation and environmental consulting business, which trades as infrastructure and environment consulting and Waterman's highways and transportation outsourcing business, which trades as Waterman Aspen. more »

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10 Comments on this Article show/hide all

drvodkaquickstep 10th May '17 1 of 10

Great article many thanks Ben. I thinks its very unlikely that the deal will fall through if you look at historic M&A in this sector.

Its certainly uncomfortable holding contrarian stocks at time but I have had considerable success doing such over recent years and investors just need to be patient and wait for the pay day.

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aflash 10th May '17 2 of 10

I bought after analysis and Small Cap comments. Vindication of your system. Substantial profit.

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Gilbert Ellacombe 11th May '17 3 of 10

Big group of private investors met the CEO at the end of November at the Equity Development private investor evening. Notwithstanding downgrades to forecasts earlier in 2016, he was very confident about the medium term prospects for Waterman. Quite a lot of the guys who met him bought shares, so will be very happy with 75% upside in less than 6 months. Meeting management teams, whenever possible, an important component of any decision to buy shares....

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Edward Croft 11th May '17 4 of 10

In reply to post #183788

As long as you don't fall for the Halo effect !

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Julian Rowe 12th May '17 5 of 10

What happens next? How does a Merger/Takeover work from an existing shareholder's point of view?

As an investor do I take the profits now?

I bought 1113 Waterman shares just before BREXIT (£1009) on 17JUN16, which I promptly regretted once I saw how the market reacted (conservative/balanced, large caps, high flyers/contrarian).

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drvodkaquickstep 12th May '17 6 of 10

In reply to post #184130


You can either sell in the market now (for around 140p) or await the final documents via your broker and await for the deal to go through following which your trading account will be credited with the balance of the sale (in your case around GBP 1.5k).

Hope that helps,

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Julian Rowe 12th May '17 7 of 10

In reply to post #184220

Very helpful, thanks for responding

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Laughton 16th May '17 8 of 10

Interesting to see quite lot of trades going through at prices slightly higher than 140.
Obviously some people out there who think a competing bid might yet arrive.

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drvodkaquickstep 17th May '17 9 of 10


Maven have been stake building at 140p (ish) as an arbitrage position which is very shrewd as should a competing bid emerge they are quids in and it if doesn't all they have lost is the difference between 140p and their buy price which is a very small % spread.

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samumk 3rd Jun '17 10 of 10

Though I am following only the Indian market, this is excellent view on how to make a choice and follow it up in the stock Ranks. I would like to know if there is any way to keep a track of a particular stock which when it moves from the super stock to any other category. It may be a great idea to make a "rank style" graph/chart of stocks so we can follow the movement easily. Being an individual not connected to the financial field as an expert, stockopedia has definitely helped me make many informed decisions. Thanks a lot.

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