Hydro International benefits from strong order book

This week’s interim results from Hydro International (LON:HYD) showed that the wastewater treatment specialist enjoyed strong revenue growth during the six months to the end of June.

Hydro – which supplies environmentally-friendly products and solutions for the treatment of water – delivered a 23.8 per cent increase in first-half revenues to £13.7 million. But as with many engineering companies, Hydro is a low-margin business, so operating profit came in at £1.04 million, although this still represented a 36.8 per cent increase over H1 2010.

“Our challenge is about growing volume at the top line,” Tony Hollox, the firm’s chief financial officer, told Proactive Investors. And Hydro looks set to continue delivering in this department. Its order book at the end of June was £25.5 million, which is getting on for double its size a year earlier (£13.9 million). This suggests the firm is well on its way in terms of recovery after it experience a dip in revenues, accompanied by a sharp drop in its profits, in 2009.

One notable contract win during the first half included February’s £3.5 million deal to supply equipment to the Thames Water sewage treatment works at Crossness in London.

The latest Thames contract followed on from two similar contracts awarded by Thames in 2010 at its Beckton and Mogden sites. These contracts had a combined value of £19.6 million.

“Three large contracts with Thames really gives us a good foundation,” said Hollox. But it has not all been plain sailing for Hydro, which continues to see delays affecting projects coming through under the new Asset Management Programme – the five-year periodic spending plan for the water industry.

According to Hydro, AMP5 (which covers 2010 to 2015) has seen tough parameters for spending imposed by the industry regulator, Ofwat, which means water companies have significant challenges in bringing through projects within budgetary constraints.

However, the firm is optimistic that projects will start to come through in the second half of this year as water companies face pressure to meet operational improvement targets.

Meanwhile, across the Pond, Hydro’s US wastewater business has continued to perform well. In May it secured a further major contract for US$2.5 million to supply sludge de-gritting and grit washing devices for the Point Loma Wastewater Treatment Plant in San Diego, California. The firm also benefited from the delivery, ahead of schedule, of equipment for the City of Boonville, Indiana. This contract, valued at US$2.8 million, is part of a sewer overflow abatement programme for the city.

Steve Hides, Hydro’s chief executive officer, expects to continue to do well in the US. “The marketplace for US wastewater is driven by the growing demand for fine grit removal,” he said. “That is our forté.”

Meanwhile, Hydro remains actively engaged in discussions regarding wastewater treatment projects in Saudi Arabia and Egypt, although predicting the timing of projects “is a significant challenge”. Elsewhere in the Middle East region, the firm did score a success in Qatar during the first half after it received a £300,000 order for its ‘Grit King’ product.

House broker Arden Partners has a price target of 145 pence each for the shares, which were flat at 135 pence each in early trading this morning. Arden said it will only lift its forecasts “when we have a clearer picture of the pace and timing of the expected recovery”. The broker’s current estimates are for a 2011 pre-tax profit of £2.52 million, compared with 2010’s profit of £2.5 million, translating to earnings per share of 11.4 pence (2010: 11.2 pence).