HYDER CONSULTING (LSE:HYC)
Hyder: more than a bunch of clever engineers
The engineering consultancy has grown through recession by providing a good service at low cost. But it’s also been relying on Australia for most of its profit. The economy is slowing there.
What it does
Hyder (HYC) provides planning, engineering, environmental and management consultancy services, increasingly to construction companies working on the design of large civil engineering projects.
Thirty-four percent of revenues in the year ending March 2013 were earned in Australia, with most of the rest evenly split between the UK and the Middle East. Its small Chinese business made a loss.
How it plans to win
The company traces its history back to the nineteenth century and over the centuries it has had a hand in the design of famous structures around the world, including, for example, Sydney Harbour Bridge and much more recently Dubai’s Burj Khalifa, the world’s tallest building. It claims fifty years experience in the Middle East and a hundred years in China, although its current operations there are small, loss-making, and in the process of being restructured.
Establishing the competitive advantages of consultancies is difficult, invariably it’s the quality of the staff. Hyder devotes considerable space in its annual report to its programmes to train and retain staff: apprenticeships, e-recruitment, graduate development, a leadership programme and a learning academy support career progression.
But employees are also the main cost of consultancies and Hyder may gain a cost advantage over some competitors by employing an increasing proportion of staff, 11% in 2013, in design excellence centres located in Bulgaria, India, and the Philippines.
Otherwise, Hyder says it has close partnerships with clients, developing unique skills, tools, and capabilities to service them, which is a tantalising, but vague suggestion of competitive advantage, if it leads to lasting relationships.
The annual report gives one example, the water security mega reservoirs project in Doha, Qatar.
KahraMaa, Qatar’s water and power authority, commissioned Hyder to design, tender procurement, and supervise the construction of five mega reservoirs. The company is committed to a knowledge transfer programme which started with a two day water preservation seminar and continues with a web-based portal allowing Hyder and KahraMaa staff to collaborate in implementing the content of the seminar.
Delving deep into the history books, Hyder’s longest running relationship involved designing reservoirs. It ended in 1994, 121 years after Colne Valley Water Company appointed John Taylor, one of Hyder’s founding companies.
Hyder earned nearly 70% of operating profit in Australia in 2013. Australia’s economy continues to be one of the World’s stronger economies, with relatively low unemployment, low inflation, and high growth, which may explain why it’s Hyder’s biggest single source of revenue, yet employs only half the staff of the UK and Middle East operations.
There’s a risk from the company’s dependence on Australia, both Hyder and Waterman, another engineering consultancy with operations there, report worsening conditions as Chinese growth slows and with it the demand for Australian raw materials. A slowdown could be counterbalanced by recovery elsewhere, though.
The company grew earnings per share through the years of the credit crunch, which is encouraging, but its first years listed on the stockmarket, the early 2000’s were characterised by very low levels of profit. Those years probably had more to do with Hyder’s prior ownership by Welsh Water in which it may have been hampered by other utility firms’ reluctance to give work to a competitor’s subsidiary. Hyder was stymied during a period of consolidation and growth in which rival firms listed on the stock market, increasing competition.
Its troubles twelve years ago, when it withdrew from India and slimmed down operations in South East Asia, may not reflect on the company’s current prospects.
Possibly one for the portfolio
An earnings yield of 9% makes the shares look fairly cheap, but I don’t know how cyclical Hyder is, and therefore how variable profits might be in future. Construction is a cyclical business but so far Hyder’s Australian operations have kept it growing, unlike rival Waterman. Most of Waterman’s business is in the UK, and it’s shrunk dramatically.
I think it’s a good company, at an attractive price, but I’m not confident enough to add it to the Share Sleuth portfolio today (21 August 2013).
It joins the Watchlist.
About the author
Richard is companies editor of Interactive Investor and a columnist at Money Observer magazine. A keen private investor through his Self Invested Personal Pension, he manages two virtual portfolios. The Share Sleuth portfolio is a hand-picked collection of mostly small-cap value shares, while the Nifty Thrifty is a mechanical portfolio designed to pick large, successful companies at cheap prices.
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