The global infrastructure market provides a number of investment opportunities in the transport, energy, communication and social (e.g. health, education) segments. There is a huge global requirement to maintain existing structures while continually investing in new infrastructure.

Project delivery, on time and on budget requires specialist knowledge and skills provided by professional services companies. Demand for these skills encourages acquisition and sector consolidation. Valuations are not demanding and the cash characteristics are positive. So 'one way or another' the sector provides a number of interesting opportunities.

For an economy looking to compete internationally it must have efficient infrastructure. The developed economies have the advantage of established infrastructure, but also the accompanying challenge of ageing and obsolescence as usage patterns exceed expectations, which necessitate refurbishment spend. Working around existing structures creates challenges not associated with new build projects, highlighting the value of the specialist expertise in the sector.

For emerging economies urbanisation, smart cities and efficient transport/mass transit schemes are key drivers. This all comes with increased demand for energy solutions, both generation and transmission, encompassing both older fossil fuels along with newer renewable solutions. Nuclear energy is both an opportunity and a challenge, providing a wide range of project potential. Supporting these themes is increased use of technology, requiring more IT, communications and network spend. Digital and online activity is touching all walks of life, including specific advantages of enhanced project modelling and outcome simulation.

The $57 trillion driver

This all adds up to significant potential spend with E&Y estimating the global investment requirement, by 2030, at $57 trillion. The professional service element of this work tends to be around 10% of the total project value with hourly based billing a common feature.

This provides greater pricing and cost flexibility for the consultants. That said the overall project spend can be hefty and subject to the vagaries of the economic cycle. In tougher times projects can be delayed/cancelled at one extreme or re-engineered/down-scaled at the other. The latter provides an opportunity for the sector constituents to work more closely with the client; stronger relationships should then drive repeat work and cross selling.

Expertise, skills and project experience increase the value of the individuals and then collectively enhance standing of the companies. As such, recruitment and retention of people is an important factor. Being able to work on iconic global projects can be an inducement for individuals to join a company.

Corporate activity is another way to add headcount and there has been a lot of activity in recent years which shows no sign of abating. The two most common reasons for acquiring are broadening the offering and expanding the geographical footprint. The UK operators have a strong international heritage adding to their attraction from a corporate point of view. Acquisition multiples have been steadily rising from c.6x EV/EBITDA in 2009 to c.11-12x most recently. There are a number of, mainly international, operators with an appetite for expansion.

The sector has positive cash flow characteristics, which enable headcount expansion, bolt-on acquisitions and a growing dividend stream. Sector trading multiples are not demanding with an average calendar 2015E EV/EBITDA of 7.3x which is below the international peer group average of 9x. The sector P/E averages 11x, a discount to the UK market average of c.14x.

Stock choices

There are a number of strong UK companies of relevance, covering a broad market capitalisation range each with a point of differentiation. WS Atkins (ATK), the largest UK operator, provides a broad service and product offering, and is regarded as a sector bellwether. RPS (RPS), a major energy related play, has a strong delivery and acquisition record. Oil price volatility creates some immediate uncertainty, but the share price reflects this.

Looking beyond a specific issue overhanging Sweett (CSG:AIM), we see a company with strong cost consultancy skills. A new CEO and clear strategic objectives provide investor interest. Waterman (WTM) is a strong UK and property play where the outlook is bright. Management is delivering on the recovery plan. Finally, WYG (WYG:AIM) combines UK planning/infrastructure along with a unique international development position. It remains an excellent turnaround story with strong management and a number of growth opportunities. Our key picks are RPS, WYG and Waterman.

Andy Brown

support services research analyst, Sanlam Securities