Small Talk: Shipbuilding industry rides crest of new wave

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The Independent Online

A careful sifting of the Alternative Investment Market does produce some real nuggets: modest companies whose size belies their world-class reputations. One company definitely in that "world class" is Hamworthy, a maker of systems for handling fluids on ships and oil rigs.

Nothing glamorous about that, you might say, until you realise that shipbuilding is no longer the Cinderella industry it has been for so long.

Chief executive Kelvyn Derrick was in exuberant form last month as he revealed the implications for shipbuilding of the breakneck natural resources boom - particularly in Asia. The world ordered 2,900 ships last year, Derrick revealed. That is 800 more than the average for the previous three years.

In these increasingly nervous times for stock markets, Hamworthy can offer the reassurance of an order book up 30 per cent at £268m - enough to keep it busy for at least 18 months. It seems the world's shipyards are chock-a-block with work until well into 2010. Hamworthy's strength is in supplying systems for Liquified Petroleum Gas tankers, but it has moved into new areas lately such as water desalination systems for cruise ships.

Latest results showed a 57 per cent rise in profits to £13.7m, delivering 22p of earnings per share. One analyst has gone out on a limb to suggest earnings could reach 30p a share in 2009, enough to reduce the earnings multiple to a reasonable 18.1. The shares have had an excellent run but still look good value.

SDL

The translation software company SDL is another minnow which has come to dominate its market globally. Growth has been driven by the need for the multinationals to have their websites operating in many languages.

The market has finally cottoned on to the potential for this business, and since the beginning of the year the shares have blossomed from 234p to 461.75p at one point. They have since travelled back to a more reasonable 408.5p.

Brokers Investec expect a significant increase in profits this year as the growth of the software business is boosted by widening profit margins in the original translation services division. They expect profits to rise from £9.64m to £12.55m, delivering 13.4p of earnings per share. This cuts the price/earnings multiple to 30.5. Clearly the market expects the fast growth to continue.

Jarvis

Is it time to release Jarvis shares from the stock market's "leper colony"? There are signs that a new and more hopeful chapter in the history of this turbulent rail maintenance company is about to begin.

Five years ago it was booming, with an annual turnover of £1.1bn in a wide range of public-sector outsourcing and public/private finance activities. But Jarvis virtually collapsed in the wake of its involvement in the Hatfield rail disaster, and since then it has been in convalescent mode as new management has striven to stabilise finances and trim back to a sensible core business. Last week the company announced a deal that could wipe out £3m a year in losses from four schools facilities management contracts. The market has partly recognised the rising hopes as the shares have recovered from a low of 42p to 61p.

Brokers are starting to pencil in projections of a recovery in turnover in the core rail and plant hire businesses, suggesting a rise from £324m to around £400m. That should bring with it an all-important return to profitability. Brewin already believe Jarvis can make 2.7p of earnings this year and 7.4p next and perhaps at least 10p of earnings in 2008/09.

TEG Environmental

The traditional North Country link between muck and brass does not yet apply to Preston-based TEG Environmental. But the City believes its remarkable composting technology will soon be bringing home the profits for shareholders. They have already seen their stock more or less double over the past year. There has been an encouraging news flow from the company as it has won more contracts to deal with waste from big local authorities and the food companies which would normally have had to go into landfill. Joint venture pilot schemes with Shell and United Utilities are also going ahead.

In the past the business has incurred heavy losses as the composting process was being developed and the customer base built up. But the broker Canaccord Adams is looking for an end to the losses in 2007 and serious levels of profitability in 2008.

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