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Bradken, UGL and Emeco Holdings may be diamonds in the rough

The takeover of engineering and project services contractor Clough (ASX: CLO) by South African company Murray & Roberts Holdings continues on since announced in July, with the company’s board unanimously supporting the offer, which values the engineering firm at around $1.13 billion.

This move may be signalling that some Australian companies are becoming attractively priced, and the market may have bottomed sufficiently for M&A activity to increase. The South African acquirer was thinking of selling off either part or all of its stake in Clough a year and a half ago to help shore up its own finances. It currently holds a controlling share of 62%.

Next, from a different direction, the manufacturer and supplier of capital goods to the resources, energy and freight rail industries Bradken (ASX: BKN) is getting some attention from the US. About half of its revenue is from overseas, and just recently it has opened a new foundry in China to take advantage of lower labour and materials costs.

It has been said that some equity firms have talked with the company and one US company, Koch Industries, may have an interest in it because of it international exposure, as well as facilities in China.

Bradken’s revenues for 2013 were down about $138 million, leading to a 33% drop in net profits. Its share price hit a low of about $4 in June, but has since rallied to about $5.80. A short-term spot of financial weakness in a time when the marketing may be consolidating could be an opportune time to buy the company for the privately held US firm.

Within the capital goods industry, there are two other companies that also are experiencing downward earnings pressure. UGL (ASX: UGL) and Emeco Holdings (ASX: EHL) may be attractive to investors who want exposure to a potential market consolidation with the chance of takeover action.

UGL announced the planned demerger of its real estate business, which will create two new ASX-listed companies. Its earnings had been growing steadily up until 2011, and then as the mining industry began to slow down and cut back on projects and development, profit levels have fallen by around 75% over the past two years.

The demerger plan may make it more attractive to a takeover after it is complete since the more profitable real estate segment would make it easier for an acquirer to gain exposure to that business without needing to get involved with the engineering side.

Emeco Holdings, which provides heavy equipment and earthmoving vehicle leasing predominantly to mining companies both in Australia and overseas, has had similar recent falls in revenues and profits due to the sagging resources sector. Of its revenue, 60% is from Australia, and profits went from $69.7 million in 2012 to $6 million this year.

It has good exposure to the Canadian mining industry, which is growing because of unconventional gas and oil development. This could be a drawing card.

If the mining services industry does come back, then it could revive itself. In the meantime, its share price is around $0.24, which is about one-fourth its book value per share of $1.02, and about one-third its $0.76 net tangible assets per share.

Foolish takeaway

When an industry is hated and shunned, there may be bargains waiting to be found, but you as the investor have to know what value to put on them, too. Set aside the share price action and focus on what strengths or risks a company has. Put a figure on the whole company, then divide that by the number of shares. That makes your “value per share”.

Your margin of safety in investing in a company may come from the fact that the share price has been beaten down so much that the net assets are worth more than the share price. For Emeco Holdings, if an acquiring firm saw potential in its revival, it could be an asset play right now.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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