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Last updated: November 12, 2013 5:52 pm
Customer inquiries have changed at Speedy Hire. Five years ago, it was mostly tradesmen asking: “Have you got what I want, and how much is it?” Now, oil majors call asking: “Can you help me build artificial islands in the Gulf?”
Since being burnt in the downturn, the UK small-cap company has moved to safeguard its future by thinking big. Steve Corcoran, chief executive, has sought to shift the Merseyside rental company from what he calls the ‘Bob the Builder’ trade towards support services work on infrastructure projects in energy, water, waste and transport.
“Service companies get better returns than hire companies,” he says. “We wanted to be seen as set apart from providing cheap rented assets that would increasingly be a race to the bottom.”
The transformation makes for an interesting case study in how a company can insulate itself against cyclical industries while moving into new global markets.
In the year to date, the shares are up more than 75 per cent, trading at 68.5p on Tuesday. But Speedy is making its move with the economic recovery still uncertain and big infrastructure in the UK constrained by the government’s austerity drive.
As Mr Corcoran says: “If the economic environment gets worse again, do we find ourselves between two stools?”
Analysts and investors got a glimpse of the transformation when Speedy reported interim results on Tuesday. The numbers showed a healthy increase in revenues from the bigger customers Speedy wants to focus on. Revenues from its top 10 infrastructure clients were up almost a third in the six months to the end of September.
Top-line growth was more restrained, with overall revenues up 0.4 per cent on the same period of last year at £169.8m. Pre-tax profit rose 12 per cent to £5.3m.
“We’re still repositioning the business for much stronger relationships with the people who value what we do,” adds Mr Corcoran. “From 2014-15, you will really start to see the value of these changes.”
Since the ill-timed acquisition of Hewden Tools for £115m in 2007 – and a deeply discounted £100m emergency rights issue in 2009 – Speedy has acted on costs, reducing its headcount from more than 5,100 in 2008 to about 3,800. It has also cut the number of depots, from 488 in 2008 to 264. Net debt to earnings before interest, tax, depreciation and amortisation has gone from three times in 2007 to one today.
We’re still repositioning the business for much stronger relationships with the people who value what we do. From 2014-15, you will really start to see the value of these changes
- Steve Corcoran, chief executive
The rental of small tools, lifting equipment and power generators still makes up the largest part of Speedy’s business and it is the UK’s biggest tool hire company by market share.
Services – which also includes tool maintenance, logistics and training – accounts for about 30 per cent of the group’s £340m annual revenues.
Larger clients can bring security of income and services offers Speedy a better return on capital. But this is lower-margin work, and profitability has suffered, with operating margins falling from 15 per cent in 2007 to 7.2 per cent in the year to March.
“The UK construction market is still under a lot of pressure,” says Andrew Nussey, an analyst at Peel Hunt. “[Speedy’s] principal customers are going to be very focused on price. Getting any kind of rate rise through is going to be very difficult.”
Speedy has sought to align itself with state-backed infrastructure projects. It worked on the Olympic Park project, setting up an on-site superstore.
In March it won a £30m “fully managed service contract” to supply all hired plant and machinery for the National Grid. It hopes to be among the contractors working on the new reactors at Hinkley Point and, should it go ahead, the High Speed 2 rail project.
The problem is, Speedy is now more dependent than ever on infrastructure projects getting the green light in an uncertain economic environment.
“Anecdotally, we believe that the level of quotes is going through the roof, but no one is pressing Go as yet,” says Paul Jones, an analyst at Panmure Gordon.
Speedy is looking to reduce its dependence on the UK by expanding overseas. Its Gulf operation, set up in a 2010 partnership with Carillion, last year made up 7 per cent of revenues.
In June last year it won a contract with the Abu Dhabi National Oil Company and ExxonMobil on the Upper Zakum oilfield, the world’s fourth largest. Speedy is providing equipment rental, logistics and maintenance on a project that involves building islands in the sea to employ onshore drilling techniques offshore.
Speedy announced on Tuesday a deal to work in the Caspian Sea – a project that will give it access to the massive Kashagan oilfield and represent its first international contract win outside the Gulf region.
But analysts caution that the global opportunity, while lucrative, is limited. “With the best will in the world, good old Speedy isn’t going to be able to do anything in North America,” says Mr Nussey. “The Middle East, if they get it right, is more than enough opportunity. Let’s not run before we can walk.”
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