Hyder worth seeking

When the bosses of Hyder Consulting announced results for 2010-11, they were keen to emphasise that 71 per cent of the group's sales and 75 per cent of its profit now come from overseas, where prospects tend to be brighter than the UK's. Yet Hyder's shares are rated in line with more UK-focused rivals and lower than those of consultants listed on overseas exchanges.

Like other engineering consultants, which advise on building projects from skyscrapers to sewers, Hyder suffered during the global downturn as projects were put on hold or scrapped. Its response was to cut costs and focus on its core areas of competence - transport, utilities, property and the environment.

The company has also focused on relationships with its key clients, a move that appears to be paying off, judging from a number of big contract wins recently. The aim has also been to win contracts offering fatter profit margins (management targets a 10 per cent margin on revenues after sub-contractor costs). So, while 2010-11's net revenues, on a constant currency basis, fell 11 per cent on the year, margins rose from 6.7 to 8.1 per cent and underlying pre-tax profits were up by 25 per cent to £20.3m.

With the business now refocused, the next question is, what kind of recovery investors can expect to see? The general view is that consultants face dull prospects in the UK, but Hyder looks better placed than most. The UK rail industry, in which Hyder has a strong presence, looks quite buoyant and Hyder has been winning work. Meanwhile, the water industry has the stability of a new five-year pricing regime and water utilities are dusting down their capital-spending plans. Even in highways, where the spending outlook is depressed, Hyder's prospects are decent after its appointment to three framework agreements.

However, opportunities outside Europe look the most encouraging. The Middle East, where Hyder's revenues fell 30 per cent to £66m in 2010-11, is a key recovery market for engineering consultants. Hyder is focused on oil-rich nations and has seen serious political unrest in only one state where it operates - Bahrain. Besides, the Arab Spring, though it brings risks for contractors, is encouraging governments to spend more on infrastructure projects. This is a key competence for Hyder and, for example, it has won a big contract for a sewage works in Bahrain.

Australia was another tough market for Hyder last year, although Asia Pacific revenues overall were 20 per cent ahead at £114m. The Queensland flooding and elections caused order delays. But the hiatus seems to have abated and Hyder says its best prospects are in Oz.

Group-wide, the bidding pipeline is encouraging, and the £312m order book covers 60 per cent of budgeted revenue for this year.

The group's cash-rich balance sheet, plus a £47m loan facility, means it is in a strong position to capitalize on opportunities by hiring staff and opening offices in promising areas, as well as making bolt-on acquisitions. Hyder's bosses want to strengthen the cash position further by giving middle management more responsibility for controlling working capital. The aim is to cut the level of receivables, by far the biggest item on the group's balance sheet. At the last count receivables stood at £112m, about £58m for work that had already been invoiced.