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Hyder set to go higher

Impressive growth in the Middle East and recovery potential in the UK leave engineering consultant Hyder looking well-placed
August 13, 2013

Engineering consultant Hyder Consulting (HYC) - which advises on construction projects ranging from skyscrapers to sewers - hasn't had the easiest time of it in recent years. During the worst of the global economic downturn, big construction projects were being put on hold or scrapped altogether, forcing Hyder to cut costs and focus on its core areas, such as transport, utilities, property and the environment. But prospects these days are looking healthier - especially in the group's Middle East markets - which leaves the share rating looking too low.

IC TIP: Buy at 473p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Growing fast in the Middle East
  • UK market set for a pick-up
  • Long-term earnings forecast to grow smartly
  • Generating plenty of cash
Bear points
  • Exposed to a weak Australian dollar
  • Dividend yield nothing special

Indeed, a trading update released by Hyder at the end of last month, covering the period from 1 April to 30 July, revealed solid overall progress. At the Middle East operations, which generate a quarter of group revenue, performance beat that seen in the same period last year. That continues the strong progress reported at the full-year stage from the Middle East, when profits soared 82 per cent to £7.1m, supported by big contract wins. In Qatar, Hyder won a £70m design contract on the £3bn Doha Expressway project, while major projects in Saudi Arabia include a Pepsico plant and the headquarters of Al Rahji Bank. All told, the group's Middle East order book jumped 40 per cent to £190m in the year to the end of March; that comprised 46 per cent of the group's order book, which itself rose 14 per cent in the year.

Meanwhile, the UK operation's results were described as "ahead of plan" in the four months to 30 July, with the transport operation having performed especially well despite a fall in profits at the full-year stage. Hyder is already benefiting from work on major projects such as the rebuilding of London Bridge station and contracts to support the investment programmes of the UK's water utility companies. But there should be plenty more work to come for Hyder following the government's announcement in June of plans to spend £100bn on infrastructure projects between now and 2020.

HYDER CONSULTING (HYC)

ORD PRICE:473pMARKET VALUE:£184m
TOUCH:460-473p12-MONTH HIGH:490pLOW: 373p
FWD DIVIDEND YIELD:2.7%FWD PE RATIO:10
NET ASSET VALUE:247pNET CASH:£24.3m

Year to 31 MarTurnover (£m)Adjusted pre-tax profit (£m)Adjusted earnings per share (p)Dividend per share (p)
201030916.335.36.0
201129020.343.37.8
201227721.644.39.0
201329823.846.612.0
2014*31423.245.713.0
% change+5-3-2+8

*Numis Securities estimates

Normal market size: 500

Matched bargain trading

Beta: 0.2

Hyder does face headwinds, however. While the Australian operation is performing well enough, it generates over a third of group revenue, which is hardly ideal given the potential currency impact from a weakening Australian dollar (A$). "In our view A$ translation effects remain a material risk," say analysts at broker Numis Securities. "We think that the group's Australian exposure has been a drag on sentiment." In addition, the fairly small German operation has fallen behind after being hit by protracted negotiations on contract variations, and Hyder's modest Asian operation reported a full-year loss, reflecting investment costs and delays in being awarded contracts.

But it's hard not to be impressed by Hyder's ability to generate cash. Net cash derived from operating activities more than doubled in the year to the end of March and the group's £24m cash pile is forecast by Numis to jump to over £50m by 2016. Add that to £56.4m of bank facilities and Hyder looks well-placed to support its internal expansion and to grow by acquisition. Hyder spent £5.4m on acquisitions in 2012-13, buying a UK electrical design business and an Australian energy and resource consultant.