AUKETT FITZROY ROBINSON (AUK)

Previous Stock Tip

These companies are all previous recommendations from the Red Hot Portfolio that I have subsequently recommended and then sold from the portfolio at a later date. By no means are these companies intended to be buy recommendations for you to go out and invest money towards their shares. For the opportunity to start making serious money from the recommendations I am making now, just start your no obligation trial!

AUKETT FITZROY ROBINSON (AUK): Merger Talks Off - Nov 2007

RHPS Recommendation – SELL

Aukett’s opportunistic attempt to merge with larger rival SMC has come to nothing. Aukett has said that its figures for the year to end-September will meet forecasts, implying earnings per share of 1.1p and the payment of a dividend. However, after the good recovery of the last year the share price has urn ot of steam, and the deteriorating outlook for the property market is not the best omen for a firm of architects. So we bank our 78% gain.

AUKETT FITZROY ROBINSON (AUK): Finishing Strongly – Oct 2007

RHPS Recommendation – HOLD

Aukett has met forecasts of a £2.3m profit and EPS of 1.1p for the year to September. The bigger issue now is whether Aukett will merge with rival architect SMC. Until this has been resolved, HOLD

AUKETT FITZROY ROBINSON (AUK): Possible merger with SMC - Sep 2007

RHPS Recommendation – HOLD

Aukett is in merger discussions with rival architect SMC. In the last year, while Aukett has been recovering strongly SMC has suffered from accounting issues and has made a series of profit warnings. As a result Aukett, which has annual turnover of c£20m, is valued at £21m while SMC, which has annual turnover of c£50m, is valued at just £13m. Aukett’s boss Nicholas Thompson, a former accountant, should certainly understand SMC’s problems, so my feeling is that Aukett would have the upper hand in the management of a merged company and could be picking up its larger rival on the cheap.

AUKETT FITZROY ROBINSON (AUK): Good interims - Jul 2007

RHPS Recommendation – HOLD

Interim results revealed a 37% increase in turnover and a pre-tax profit of £1.3m. Aukett is seeing buoyant demand for its services both at home and in Russia and Central Europe, and having paid off its bank debt could pay a dividend this ear.

AUKETT FITZROY ROBINSON (AUK): More Work in Russia - Mar 2007

RHPS Recommendation – BUY

Aukett is to work on a new development in Moscow to include a four star hotel and offices. Added to other work, Aukett now expects to earn over £3m in fees from its Russian business over the next few years, while it has reiterated that the “UK market for commercial architectural services is buoyant.” Meanwhile, shares in rival quoted architect SMC have crashed on the admission that its revenue recognition policy has been too aggressive. This does not apply to Aukett, which could benefit from SMC’s difficulties.

AUKETT FITZROY ROBINSON (AUK): Recovery Confirmed - Feb 2007

RHPS Recommendation – BUY

Annual results confirmed Aukett’s recovery, with second half profits of £786,000. Aukett is especially busy in Russia, where it has long experience and payment terms are in fact more favourable than they are in the UK. Aukett is now looking to grow through acquisition, but is sifting through a large number of potential candidates and we may not hear anything for several months. In the meantime, the business will be driven by the flow of increasingly large contracts and some improvements in efficiency as Aukett shares work around its international network. Broker J.M. Finn is forecasting a pre-tax profit this year of £1.9m for earnings per share of 1.1p, followed by £2.9. and 1.4p in 2007/8. The share price now looks about right, and I have set a new buy limit of 15p and a 12 month target of 25p.

AUKETT FITZROY ROBINSON (AUK): Buy this fast-growing architect for a potential 185% return in the year ahead - Nov 2006

RHPS Recommendation – BUY

Turning to my second Red Hot pick of the month, I have to say this is the first company I have come across where one of its clients has allegedly been assassinated. It is also the first to have designed a camel racing track.

Of course, neither of these facts are likely to make you money. So what I really want to tell you about is why this stock – a company that is valued today at about £10m – could be making close to £”m of profit within two years, and perhaps £5m five years out. This is just the sort of company I love to come across.

Let me start the story back in the late 1980s, when several firms that had been around for 15 years. This move turned out to be an unhappy experience. Some ill-judged acquisitions in Eastern Europe, and the tough business climate of 2001 and 2002 saw it run up losses in three consecutive years. Customers lost confidence and started to place business elsewhere.

After a leading shareholder managed to oust the board of directors, Aukett fell into the arms of a private competitor, Fitzroy Robinson, in March 2005 in what was effectively a reverse takeover. Aukett Fitzroy Robinson was born.

Running the show since then has been Nicholas Thompson, an accountant who had been Fitzroy Robinson’s Managing and Finance Director. When I met him in Aukett Fitzroy Robinson’s (AFR) headquarters in Devonshire Street (owned, incidentally by one of the group’s clients, Howard de Walden Estates) he explained that the measures he had introduced to restore the Aukett business to profitability had been no more than those which for years had made Fitzroy Robinson such a successful business. He has restructured the group, closed several overseas offices and one in Glasgow, and moved the Aukett staff from Battersea to the West End where they are close to the Fitzroy Robinson staff.

Investment has been made in the latest AutoCAD design software, and a common IT system has been rolled out throughout the group’s offices. Robinson has introduced Aukett to some basic business discipline, too. “Aukett”, he explained, “was run by architects”, and clients were getting away with settling their bills well beyond Fitzroy Robinson’s 60 day limit. Thompson now checks every contact before it is sent to a client, and makes sure that bills get paid.

From camel racing tracks to the Royal Exchange Building in the City of London

Aukett has now been restored to profitability, and thanks to this and to the group’s greater scale it has regained what Thompson described as “gravitas”. It is trusted once more by its clients, who are developers of commercial property. The client list includes most well known property developers, as well as hotel groups, big retailers, financial institutions and many more. Aside from designing the buildings, AFR will obtain planning consents, draw up master plans for large complex sites, and take care of a building’s interior design. They have worked on the National Air Traffic Services headquarters at Southampton, the conversion of the Royal Exchange building in the City of London, a new research centre for GE in Munich and a building for the Bank of Moscow.

The standard practice in this industry allows the architect to earn a fee based on a percentage of the project’s value. This means that the bigger the project, the bigger the fee. Customers’ confidence has been restored. AFR has recently been appointed for some major developments such as the £150m redevelopment of the St Mary Le Port are of Bristol.

As AFR improves the size and quality of its contracts, profitability will improve. But already the group is set for a major earnings recovery over the next year or so. Having recorded turnover of £6.9m in the six months to March 2006, turnover for the year that finished in September should be at least double that. For the current financial year £15m of turnover looks very obtainable. With the cost base now sorted out, financial controls strengthened, and investment having already been made in the necessary technological infrastructure, the profit margin should be restored.

Quoted competitor SMC achieved an operating profit margin of 25% in its last full financial year. Assuming that AFR can achieve just half of that, it would make an operating profit of about £2m, and since it has virtually no net debt, this would become the level of the pre-tax profit. With the tax losses that came from Aukett, I think it is reasonable to assume a tax rate of 15%, so we get a post-tax number of £1.7m for the year to September 2007. Divide by the 144.8m shares in issue and earnings per share come out as 1.17p, for a price/earnings ratio of 6. That is cheap by any standards and well below SMC Group’s forecast P/E ratio of 9.

AFR, though, is a very small company. Its total market value is just £10m, and with over half of the shares in the hands of directors and staff, the free float is miniscule. This could work against it, unless the business can grow. And I think it will. AFR has already stated that it wants to double its income by 2010, and while this may be possible without making acquisitions, the latter is likely. Such acquisitions would be private companies, and one could reasonably expect that they would boost AFR’s earnings. But we will have to wait and see.

Well placed to take advantage of growth in Eastern Europe

In the meantime, AFR is winning new, and better quality business, and it has a very interesting chance to cash in on the growth of Eastern Europe, where local architects have little experience of developing sites to acceptable investment grades. AFR has offices in Frankfurt, Berlin, Bratislava, Moscow, Prague and Warsaw, and is sizing up the opportunities in Romania and the Ukraine.

Both Aukett and Fitzroy Robinson have always been quite adventurous. FR did well in the Middle East in the 1970s – including designing those camel racing tracks, and although Aukett made some ill-judged acquisitions in Eastern Europe, the group has plenty of experience in the region, (including that of he assassinated client in Kiev). It is also looking to transfer some jobs from the UK to this network of relatively cheap overseas offices, improving profit margins and evening out the group workload.

RHPS Verdict: Since I visited AFR, it has said that the results for 2005/6 (which will be announced in early December) will be “at the higher end of management expectations”, and that it has won the largest European contracts in its history. These projects in Frankfurt and Moscow will earn fees of £2.6m over the next two years.

The share price as just begun to recognise the revival of AFR’s fortunes, but should have much further to go. Buy today with a 12 month target of 20p.

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The figures refer to the past and past performance is not a reliable indicator of future results. The past recommendation highlighted here is a small company share.By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. These figures do not include the bid-offer spread, unless otherwise stated. Since the service began on 01/12/98 running through to 31/07/07, the average overall performance of the shares recommended is up 19.91%.All gains exclude dividend payments and dealing costs, unless otherwise stated. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances. Full portfolio available on request. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. FSA No. 115234.

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