Hamworthy, a leading marine engineer based in Poole, reported last week that turnover (£214m) and earnings per share (32.2p) had tumbled by 15% and 20% respectively. Not only are fleet owners struggling to raise funding for new vessels, but those with capital are sitting on their hands expecting prices to head lower. Nonetheless, with the stock down 55% from its 2007 highs of 665p, there's opportunity amid the stormy waters.
Hamworthy is one of the world's top two suppliers of niche pumps and waters systems used to transport fluids by boat. The firm's patented liquefaction technology improves ship safety and fuel efficiency by refreezing liquid natural gas (LNG), which tends to vaporise during carriage. Following the discovery of vast quantities of cheap gas in American shale deposits over the past few years, Hamworthy looks well placed to benefit from escalating demand.
Furthermore, with the oil and gas sector representing around 80% of turnover, Hamworthy is beefing up its operations in related areas, such as desalination, sanitation and engine-room systems for cruise-liners and container ships. In fact, greater environmental awareness should be good news for the group, as it is now mandatory for most boats to combat pollution by cleaning effluent from dirty water before it is bilged into the oceans. Better still, the board has done a sterling job of protecting profit margins of 9% during the downturn by cutting costs and reducing its 1,000-strong workforce by 17%. It has also steadily shifted its presence towards the higher margin after/retrofit markets, where it repairs and maintains an installed equipment base of 65,000 pumps.
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Hamworthy, rated a BUY by Atrium Capital (Aim: HMY)
Risks include the fact that the marine and leisure industries are still on the rocks. There are also fears over possible contagion to offshore projects following BP's Deepwater Horizon rig blowout, together with foreign-exchange considerations.
But despite these potential problems, Hamworthy looks solid, with net funds of £72m (representing 158p per share) and a £142m order book covering 75% of its targeted revenues for the year ending March 2011. The City is cautiously predicting 2010/2011 turnover and underlying Ebita of £154m and £11m respectively and a 9.5p dividend (equivalent to a 3.2% yield). Moreover, CEO Joe Oatley is "confident of meeting expectations". Investors wishing to diversify away from the ailing pound should note that 88% of revenues are earned overseas, mostly in the Far East, China and continental Europe. So I would value the group on a through-cycle eight-times Ebita multiple. After adding back the cash pile, that gives an intrinsic worth of around 380p a share. Altium has a 341p price target.
Recommendation: BUY at 293p
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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