Exova downbeat on short-term oil and gas prospects

Exova, the Edinburgh-based materials testing group, today reported 'very strong' first-half growth but said conditions in the oil and gas sector were likely to weaken further this year.

Exova said it was on track to meet City hopes despite the weak oil and gas market. Picture: Contributed

The company, which employs more than 4,300 people across 138 laboratories and offices around the world, posted a 9.8 per cent rise in pre-tax profits to £20.1 million for the six months to the end of June, on revenues 13 per cent higher at £160.9m.

Sales received a 7.8 per cent uplift from acquisitions, including the purchase in February of Singapore-based Admaterials, a specialist in construction materials testing and certification.

In July, the group – which floated on the London market in 2014 – paid £13.9m for Jones Environmental Forensics, a Welsh business that specialises in testing contaminated water and soil, and chief executive Ian El-Mokadem said the pipeline for further deals was “encouraging”. The group has completed 16 acquisitions since 2013.

El-Mokadem added: “This is another satisfactory set of results in line with our expectations, demonstrating clear progress towards our medium-term objectives. Overall growth was very strong, driven by acquisitions and broad based organic growth in all areas of the portfolio, with the exception of our oil and gas and industrials cluster, which we now expect to weaken further in the second half.”

He told The Scotsman that the oil and gas sector accounts for just 9 per cent of the group’s sales, “and the rest of the business has been growing well”.

“We’ve been increasing our exposure to other areas where there are better growth opportunities. In the short term we’ve been having to cut costs and downsize a little bit in the oil and gas business, but we remain very positive about it in the medium term – it’s an important part of the group and will recover. The difficult part right now is predicting when that will be.”

Exova has cut almost 150 jobs in its global oil and gas and industrial business, but El-Mokadem said fewer than ten jobs had been axed in Scotland. The group racked up £2.3m of restructuring charges in the first half – compared with £1.4m for the same period last year – mainly as a result of redundancy costs.

He said: “I hope very much that we can build up the staff numbers again as the market improves. Today we employ just over 200 colleagues in Scotland, and while we’ve released a very small number of people from our oil and gas labs in Aberdeen and Edinburgh, overall our employment levels have remained about the same. We’ve been growing our environmental business in Hillington and our head office and shared service functions in Newbridge.”

El-Mokadem said Exova’s portfolio of businesses had been strengthened by its recent acquisitions and the sale earlier this year of ten laboratories – including two in Scotland – as part of an £18m deal with Eurofins Scientific.

“With further cost actions taken to mitigate the poor trading conditions in oil and gas, we are on track to achieve market expectations,” he said.

Analysts at Investec said the disposal of the group’s food, water and pharmaceutical business in the UK and Ireland to Eurofins highlighted its willingness to plough capital back into more productive areas of the business, adding: “We applaud this.”

The broker, which has pencilled in a full-year pre-tax profit of £40.1m, said: “However, end market conditions are likely to remain broadly difficult so we expect low growth to be a recurring feature, which is reflected in our medium-term forecasts. Nevertheless, Exova remains fundamentally undervalued and of potential strategic interest.”

The interim dividend, to be paid on 9 November, was raised 5 per cent to 1.05p a share.

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