AMP5 gradually building up. Finally!
We understand from Grontmij management and sector feedback that AMP5 spending (5-year UK Water framework over 2010-2015) has already been delayed by several quarters and the ramp-up was slower than anticipated. This has already led to quarterly disappointments, especially since capacity was held idle, severely impacting margins. Industry sources refer to the so-called boom & bust scenario in the UK water sector, where capex tends to be concentrated towards the middle of the 5-year funding cycle. This leads to an intense three year period in the middle of the cycle, and reduced spend at the start and the end of each AMP period. We are now exactly in the middle of the cycle, and witness that the pick-up is even somewhat slower than before.
This is confirmed by Hydro International stating that tough parameters for spending imposed under AMP5 by Ofwat have presented the water companies with significant challenges in bringing through projects within budgetary constraints. This seemingly delays procurement at a time when water companies typically start to gain momentum. Nevertheless, Hydro International remains optimistic that projects will start to come through in the 2nd half of the year as water companies face pressure to meet operational improvement targets. This trend is also confirmed by Galliford Try, which claims to have secured the largest portion of any contractor of the 5-year AMP5 water programmes in 2010. The company noted last Wednesday they are witnessing a build up in AMP5 revenues. Also Balfour Beatty mid August noted that AMP5 water utility work has accelerated following the slow start of the year. This should bode well for the coming quarters.
Pipeline development solid, Grontmij well positioned:
Grontmij has officially announced 12 UK Water contracts over the last 2 years, and we believe the actual number is even higher than that. With AMP3 amounting to € 12.0bn, AMP4 € 17.4bn and AMP5 seen at € 22.5bn, UK Water infrastructure investments are clearly in growth modus. Based on the number of orders announced we estimate that AMP5 revenues should amount to € 40-50m p.a. over the coming 5 years, where we expect the UK as a whole to represent € 70-80m of Grontmij’s gross revenues.
We see room for further order announcements as the Environment agency is increasing awareness for flood defence as a recent study noted that 1/6th of the UK properties is at flood risk. Also recently the Scottish first minister said he wants to develop water as the key asset of the 21st century. His government plans a new Water Bill intended to maximise the opportunities the hydro economy provides, ensure that management of the water sector remains cutting edge.
According to the American Engineering Association Grontmij is the 2nd largest European water engineer. We believe that especially in the UK, Grontmij is well positioned. With first signs of pick-up in AMP5, we also expect profitability in the country to gradually return to normal, while the pipeline looks solid. We stick to our Accumulate rating.