Turnaround progress provokes bid interest in Specialist Energy

Shares in Specialist Energy Group (LON: SEGR), which supplies pumps to the worldwide power industry, have continued to hold up well since news emerged earlier this month that it had received approaches that could lead to an offer for the group.

On 3 May, when SEG announced it had received bid interest, the shares shot up by more than 20 per cent and ended the day some 15 per cent higher at 83 pence each. This week, they have been trading for between 83 pence and 86 pence each.

The group’s board stressed that these discussions are at an early stage.

But even if the approaches to SEG do not lead to an eventual offer for the group, they should help to highlight the significant progress made during the past year as the group’s management has striven to achieve a corporate turnaround.

Particularly beneficial to the group’s financial performance has been the strong progress made by Hayward Tyler, the manufacturer and servicer of specialist pumps that was acquired by the group early last year.

Founded in 1815 Hayward Tyler first developed its key boiler circulating pump (BCP) in 1957 so that water could be pumped through a power station’s boiler tubes at high temperatures and pressures. 

The business sells its BCPs to large power utilities and leading boiler manufacturers from around the world. As well as being able to operate at high temperatures and pressures, BCPs also make power generation more efficient by shortening boiler start-up times.

Each BCP sells for between £250,000 and £300,000, and a power station will typically use three BCPs – with two in continuous operation and a third kept in reserve.

Of course, Hayward Tyler also makes pumps for a variety of other applications, including sea water lift and fire water pumps for the oil industry, nuclear process pumps and pumps for diesel engine manufacturers.

The manufacturing division of Hayward Tyler made good progress in both revenue and margin terms last year. 

SEG has continued its focus on improving margins across all its products and improving delivery times to customers.

It has stated that a restructuring of the manufacturing division has aided this process, resulting in ongoing improvements in terms of contract negotiation, visibility and project management.

Meanwhile, lead times on BCPs have been reduced to less than 12 months, which SEG says adds a further competitive advantage in the eyes of its customers.

Consequently, Hayward Tyler’s manufacturing division improved its operating margins (before central costs) to 7.2 per cent for the full year, from 6.7 per cent during the first half, although second half revenues of £8.8 million from the division were lower than those achieved in the first half 2010 by around £1 million.

The firm’s aftermarket business performed even better, with second half revenues of £19.9 million (compared with £8.8 million of revenues during H1 2010).

And in this business the operating margin increased significantly in the second half to 23.3 per cent from just 13.6 per cent during H1 2010.

SEG delivered an increase in overall revenues of five per cent during 2010 to £38.5 million (2009: £36.8 million), while the group’s operating profit increased 52 per cent to £3.6 million and net profit improved 23% to £2 million.

Meanwhile, net debt was halved during the year to £6.7 million (31 December 2009: £13.7 million).

Another sign that the turnaround strategy is working has been an increase in orders. Order intake increased to £30.1 million during 2010, compared with £29.2 million. 

The lead time on the manufacturing side of the business is around 12 months, which means the business now has an order book stretching out beyond Q1 2012.  

In January this year, the group secured £5.9 million of new orders across its operating divisions. 

By April the order book stood at £22.2 million, with the manufacturing division accounting for £14.4 million of these orders.

In India it won a contract to deliver three supercritical BCP units for the proposed 1,980 megawatt thermal power plant at Koradi in Nagpur.

In China, Hayward Tyler won a repeat order for two supercritical BCP units from Dongfang Boiler Group – one of the largest power boiler suppliers in the country.

In Europe Hayward Tyler won deals to supply sea water lift pump and fire water pump motor units to North Sea oil and gas projects.

And in the US the firm continued to make significant progress in the nuclear aftermarket, securing in January a BCP overhaul project at the AES Conesville power station in Ohio. (Hayward Tyler has installed equipment in almost 70 per cent of North America’s nuclear power plants.)

Elsewhere within the group, SEG’s is continuing with its planned exit from its legacy Nviro business. 

After it sold the tangible assets of Nviro’s subsidiary Vertus Technologies in July last year, the group has retained its intellectual property relating to clean coal technology. 

Discussions are ongoing about potential licensing and revenue sharing opportunities with a number of parties.

Of course, all eyes are on the possible takeover of SEG, though there is no certainty that a formal offer will materialise.

But the very fact that there is interest shows that the group’s management is progressing nicely with its turnaround plans.