Gamble of the week: leading marine engineer

The share price of Paul Hill's gamble, operating in the uncertain areas of shipping and energy, has plummeted in the past 15 months. But many of the best sailors operate in choppy waters…

As Joe Oatley, chief executive of Hamworthy, a leading marine engineer, put it at the interim results in September, "What more do you want us to do?" Unfortunately for Mr Oatley, the Square Mile can be a brutal place at the best of times. And at the moment, if you're a small-cap stock listed on Aim, operating in the uncertain areas of shipping and energy, then ratings have simply been torpedoed no questions asked. Hamworthy's share price has sunk by more than 60% in the past 15 months. That said, where there are choppy waters, many of the best sailors operate.

Hamworthy plc (Aim:HMY)

It is the world's number-one or -two supplier of niche pumps and water systems used for transporting fluids at sea, such as liquid natural gas (LNG). The firm also owns patented liquefaction technology, which improves both a vessel's safety and fuel efficiency by refreezing air-borne LNG back to minus 160 centigrade, while the gas naturally evaporates during transportation.

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Furthermore, with the oil and gas sector representing more than 70% of turnover, Hamworthy is beefing up its operations in other related areas, such as desalination, sanitation and engine room systems for cruise and container ships. In fact, greater environmental awareness should be good news for the group, as it is now mandatory on cruise liners to use water treatment systems to clean effluent before it is bilged into the oceans.

Of course, with the shipping and leisure industries on the rocks, the immediate future is at best foggy. Even so, Hamworthy seems well placed to weather these storms at last count it had net funds of £56.6m (or around £30m excluding customer deposits) and a chunky £309m order book providing both financial ballast and excellent revenue cover for the second half. Looking ahead the City expects sales and underlying EPS of £250m and 35.5p respectively for the year ending March 2009, on top of a 9p dividend, putting the stock on a forward p/e ratio of 6.4 and paying a hefty 4% yield. And for investors wishing to diversify away from the ailing pound, more than 90% of revenues are earned overseas, mostly in the Far East, China and continental Europe. All told, with the share price unfairly hammered, this looks like a good entry point for the more adventurous investor prepared to sail through the short-term storms of the oil and gas markets. Further out the demand drivers from increasing environmental legislation and energy usage, particularly for LNG, remain robust.

Recommendation: SPECULATIVEBUY at 233p (marketcap £110m)

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.