First published in the Quoted Cleantech newsletter - November 2009

by Andrew Hore

Investors seeking cleantech opportunities are losing out if they look only at companies whose operations are focused purely on the sector. Other companies less well known for their cleantech operations, but with strong management teams and a profitable history, can frequently offer greater potential.

One such company is Hamworthy, a supplier of marine fluid handling systems. The Poole-based firm is split into four divisions: pump systems, gas systems, inert gas systems and water systems. Its main customers are operators of shipping and offshore oil and gas facilities.

Whilst the climate change lobby is heavily focused on aircraft and road vehicles, shipping is also a major polluter, and Hamworthy’s technologies can help to prevent this. A key part of its strategy is to seek opportunities driven by environmental legislation.

In a results presentation to analysts earlier this year, Hamworthy’s management set out the timeline for environmental legislation. During 2010 the limit on sulphur emissions in Emission Control Areas will be reduced to 1%, with a further reduction to 0.1% scheduled for 2015. The global limit for sulphur emissions will be cut to 0.5% by 2020.

Hamworthy recently acquired marine exhaust emissions technology developer Krystallon, which cost £950,000 plus £800,000 dependent on a testing programme. There are further deferred payments dependent on profit performance over the next six years. BP, which was a former owner of Krystallon, invested £6.5 million in the business, which will become part of Hamworthy’s inert gas systems division.

Krystallon will benefit from the division’s experience in seawater scrubbing and its infrastructure and contacts around the world. The company’s technology eliminates nearly all sulphur emissions, plus up to 80% of the particulate emissions which, Krystallon argues, cause the ‘black carbon’ that is thought to ‘blacken’ the ice caps and speed up global warming.

Meanwhile, although there is already a global requirement for ballast water treatment for new small- and medium-sized ships, over the coming years even more ships will be forced to adhere to this requirement. Then, at the beginning of 2016, all of the existing fleet will be required to treat ballast water.

Global standards for wastewater effluent quality from ships are also coming into force. This ballast water and effluent legislation is the reason why the revenues of Hamworthy’s water systems division are expected to hold up much better than other parts of the business, which are more reliant on the cyclical shipbuilding sector.

Water systems division products include membrane bioreactor systems that combine aerobic sewerage treatment with filtration and micro-membrane separation, fresh water generators, sewerage treatment plants and oily water separators that reduce the pollutant level of a ship’s bilge water.

Longer-term, it is anticipated that further opportunities will arise from legislation against the flaring of gas and relating to the reduction of volatile organic compound emissions from vehicles, aircraft and ships.

Hamworthy has been a highly-rated company for the majority of its time on AIM. The tough shipping market means it is expected to report falling profits over the next couple of years at least. New build orders for vessels slumped 92.5% to 151 in the year to August 2009.

This means that, although Hamworthy is still working on ships that were ordered a couple of years ago, its order book has fallen from £303 million to £207 million over the past year. The main fall in revenues will show through in 2010/11, when Hamworthy’s revenues, forecast at around £150 million, are expected to be £100 million less than in 2008-09.

Analysts believe that profits could fall from £24.5 million last year to around £18 million in the twelve months to March 2010. Profits are forecast to decline to around £11 million in the following year, with cost cutting partly offsetting the decline in revenues.

However, the company’s balance sheet is strong. Broker Charles Stanley estimates that Hamworthy will have net cash of £59 million by the end of March 2010, even though £5.5 million will have been spent on acquisitions and £3.8 million paid out on dividends. That cash figure is roughly one-half of the present market value of Hamworthy, and provides the company with the firepower to acquire more niche cleantech businesses.