Why recent scandals put me off investing in Petrofac Limited and BT Group plc

Scandals could destroy shareholder value at BT Group plc (LON:BT.A) and Petrofac Limited (LON:PFC).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Oil engineering, procurement and construction firm Petrofac (LSE: PFC) has been through the mill in recent years. The flagging oil price and an ongoing investigation into the company by the Serious Fraud Office for “suspected bribery, corruption and money laundering” have hurt both the company’s reputation and investor confidence.

The shares have fallen 61% since April. But investors finally got something to cheer about today after it announced the signing of a long-term Framework Agreement (FA) for the provision of Engineering, Procurement and Construction Management with Petroleum Development Oman (PDO). 

The FA was awarded after Petrofac impressed PDO during a three-year contract. The deal is set to last 10 years with an optional five-year extension if the services provided are up to scratch. Craig Muir, the Managing Director of Engineering and Production Services at Petrofac said: “This is a landmark agreement between our two companies and marks a new level of collaboration between PDO and Petrofac. It builds upon a long-standing relationship which spans more than two decades and encompasses a significant number of projects undertaken in Oman on both a lump-sum and reimbursable basis.”

Given the relationship between the two companies, barring a disaster, it seems likely Petrofac can expect a steady flow of business for the long-term.

CEO Ayman Asfari has helmed the firm since the early 90s and owns 18.5% of it, but his position could be undermined by the SFO investigation.  Investors must also consider the ramifications of a guilty verdict beyond a fine and reputational damage. If the company’s presentation of its financial performance turns out to be inaccurate, we could see massive writedowns à la BT (LSE: BT.A).

For those with a very healthy appetite for risk, however, the company offers a 14% yield twice covered by free cash flow. In my opinion, this gargantuan payout could be a siren song, rather than a bankable dividend. I’ll be avoiding the company until the SFO announces its findings.

Accounting scandal

Back in January, BT lost nearly £8bn of its market cap in a single day after announcing a massive accounting scandal at its Italian division. It is cutting 4,000 jobs over two years in an attempt to recover from the £530m financial hit incurred as a result of the shocking revelation. 

Trading at the company is smooth, at least. Revenue, profits and free cash flow are expected to remain flat this year and industry regulator Ofcom recently announced that although BT must spin-off valuable asset Openreach, it will still remain the 100% shareholder.

This is a wonderful result, considering the potential options on the table. Openreach owns the majority of broadband and phone line infrastructure in the UK, therefore generating predictable cash flows. This decisions means BT can keep its cash cow. Suddenly its financial position, including sports rights bidding power, balance sheet and dividend safety, looks better than I expected it to.

That said, BT still carries a considerable £9bn pension deficit and heavy competition in the pay-TV and mobile markets. The company’s 3.5% yield looks safe if forecasts are accurate and the shares trade on a PE of 16. These ratings might be attractive if BT wasn’t mired in scandal, but given the current uncertainties at BT, I’ll be avoiding the shares. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zach Coffell has no position in any shares mentioned. The Motley Fool UK owns shares of Petrofac. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »