The 'invisible' penny share fuelling China's growth

This small-cap engineering firm exports specialist equipment for power stations, with a lot of its business going to China. It has been around for nearly 200 years, yet it is 'invisible' to most investors, says Tom Bulford.

Chinese power generating capacity has grown six-fold since 1987. And it's not stopping there. Last year China spent a massive $115bn building the power stations needed to fuel its seemingly intractable growth.

These are big numbers for a big project. And last week I paid a visit to a little-known UK company that has an integral role in this project. I was at the Luton factory of Hayward Tyler, a venerable engineering company that can trace its history all the way back to 1815.

Today, Hayward Tyler is a world leader in boiler circulating pumps, many of which it exports to China. These are large metal cylinders containing about a kilometre of wiring. These cylinders are used to pump cooling fluids around the power station boiler. This makes a big improvement in efficiency - not least by reducing the time taken to start up the boiler.

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There are about four thousand of these pumps in use around the world. More than half of these have been made by Hayward Tyler. The company's principal competitors are the German engineer KSB and Japan's Toroshima. Hayward Tyler sells these pumps for over £250,000 each. In addition to this, it makes money from subsequent servicing.

A hidden hive of activity supplying the world

I walked around the factory with group managing director David Boughey. With remnants of a nineteenth century chapel, the site is large and reminiscent of a bygone age. But such impressions dissolve as one enters the assembly area.

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Here one sees large forged-steel shapes being refined down to exacting specifications. They are then fitted with their complex electrical components before being packed in crates and sent off around the world. In another large shed, old pumps and motors were waiting to be stripped down and refurbished, a job that can demand fast turnaround times.

Given the skills shortage across British industry, I asked Boughey how easy it is to find suitably qualified staff. He told me that Hayward Tyler had an apprentice scheme.

Having refined a list of 30 down to eight eligible candidates for interview, he was aghast to find that only four bothered to showup.

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This is the sort of revelation that makes businessmen despair. But I'd say that the four absent apprentices are missing a great opportunity, because the future for Hayward Tyler looks pretty good...

A penny share company flying the flag for Britishindustry

Now owned by AIM-quotedSpecialistEnergy Group(LSE: SEGR), Hayward Tyler is in the hands of rigorous management. They know that they are selling a great product with a global reputation into a market for which growth is assured.

Hayward Tyler supplies all of China's five leading boiler makers. Over 400 of its boiler circulating pumps are now dotted all over the country. A further 120 can be found in India, while 70% of North America's nuclear power stations rely upon a Hayward Tyler pump.

Global energy demand is rising relentlessly, especially in the emerging economies of Asia. But on top of demand for new capacity is the need to replace the installed base.

Power plants last for roughly 40 years before they need to be replaced. In the next 15 years, 282 gigawatts of power generation capacity will reach that age. That's twice as much as all the capacity that has reached this age in history.

But Hayward Tyler is not exclusively about boiler circulating pumps. It also makes pumps and motors for various industrial uses, of which one with particular promise is subsea oil and gas production.

Hayward Tyler made the first ever subsea electric motor in 1908 for marine salvage. In 2008 it supplied three of the largest subsea motors ever built to Aker Kvaerner Subsea. These are used to enhance oil recovery from under the Norwegian Sea, by pumping seawater into the oil reservoirs.

Why the City is blind to the potential of this dirt cheap penny share

Chief executive Ewen Lloyd-Baker has high hopes for this product, and is rightfully optimistic for the group as a whole. But despite a confident trading statement last week, the City does not seem to be alive to the prospects. It seems that Specialist Energy Group is 'invisible' to most investors.

The shares of Specialist Energy Group trade on just five times forecast earnings. That is low by any standards. But it is particularly cheap in relation to other successful, exporting engineering companies like Rotork (LSE: ROR), Weir (LSE: WEIR) or Spirax Sarco (LSE: SPX).

This could be to do with two things. One is the fact that Specialist Energy Group only emerged as the stock market quoted owner of Hayward Tyler at the start of the year. The other is the wide dealing spread of the shares.

But the real reason is probably that Specialist Energy Group is just too small to attract the attention of the City. But to me, that's further evidence that the real stock market bargains lie in the small company sector.

This article was first published in Tom Bulford's twice-weekly small-cap investment email The Penny Sleuth.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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