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Exova continues good progress

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World Pipelines,

Exova has confirmed the strength of its portfolio, with the softening in oil and gas failing to de-rail its progress. Ten-month organic revenue growth of 2.7%, plus 6.6% from acquisitions, gives 7.5% after a modest currency headwind. The company estimates that margins are slightly lower due to mix (less high-margin Oil & Gas business and growth elsewhere), but costs are being managed appropriately. Exova’s FY15 expectations are unchanged and it makes small upward changes to its estimates, with the 210p target price and ‘Buy’ intact.


Oil & Gas represented c.16% of group revenue in 2014 and reduced activity in that market has cast a disproportionately large cloud over investors’ perceptions of Exova. Exova estimates that revenue in that sector declined by c.9% organically in the first ten months of 2015, more than offset by good momentum (+7.6% organic) elsewhere to leave overall organic growth at 2.7%, in addition to the contributions of the acquisitions. This is better than the company expected. Although the base assumption is of a continuing year-on-year drag from Oil & Gas in 2016E, in addition to slower economic activity in North America, Exova’s performance so far gives them confidence to raise estimates by a little for all forecast years.


According to Exova, the outsourced provision of specialised testing, inspection and certification (TIC) services – most of which are non-discretionary – is an area of sustainable growth, as product expectations and qualifications become more demanding and as manufacturers de-risk their businesses and concentrate resources on their own core skills. Exova has a well-diversified portfolio of businesses and is able to compensate for weakness in any particular niche.


As before, Exova compares itself with its international peers, applying the average of their EV/EBITDA valuations for 2015E to 2017E to our estimates. After small changes to its forecasts and to peers’ valuations, the company’s target price is unchanged. With substantial implied upside, and in spite of limited liquidity in the shares (CD&R still owns 54%), Exova reiterates its Buy recommendation.

Edited from press release by

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