Pipework and fabrications supplier Chieftain has historically been a cyclical business. Dependency on North Sea oil and gas activity meant that for some years the Newcastle-based company generated good cash, while in others it slumped to losses. However, the addition of an engineering services arm less than two years ago has given the group significant levels of contracted revenues that will help to balance the lumpiness of its income.

Chieftain’s improvement began when it snapped up experienced industry hand Malcolm Oliver when he left one of the main ventures in the engineering services sector in the North East.

It is his knowledge and contacts that have assisted Chieftain in winning four significant contracts since February 2005.

Engineering services, forecast to contribute 30 per cent of the group’s turnover this year, involves managing the servicing and maintenance requirements of the plant and machinery of chemical factories and refineries, and customers include BASF and ConocoPhilips.

This division has a much lower margin than the rest of the group – operating margins will probably be around three per cent. That reflects the lower risk profile of the work, but there is scope to add to margins by bringing more work in-house. Chieftain bought Bringover, which maintains and repairs machinery, in September 2006 and it will be able to use the firm in its own contracts. Future acquisition targets could involve painting, scaffolding and electrical operations.

Meanwhile, the marine outfitting division installs insulation for warships and offshore oil platforms. In recent years a large proportion of its turnover has come from long-term defence contract work. The division is currently working on the first phase of the new Astute class submarines. The first three submarines should all be finished by 2010 but there are likely to be a further three built after that. Next year Chieftain should hear whether or not it has won the contract for two large aircraft carriers. If the new contracts are won then this business could stretch over the next decade.

Chieftain’s fabrication business operates the largest pipework facilities in the UK. Competitors have withdrawn from the sector so Chieftain is in a strong position. There is strong demand for fabricating dampers for flue gas desulphurisation plants for coal-fired power stations, as well as oil and gas work. Removing asbestos from buildings is the highest-margin work, but these activities account for only seven per cent of total turnover.

An increasingly profitable sideline for the fabrication business is the provision of skilled workers for customers, and there is potential to grow this, particularly if it widens its offering to include managerial staff.

Investors can expect positive news on new contracts over the coming months, and it should be noted that next year’s profit forecast supposes that Chieftain will win additional contracts. Even so, there is still a realistic possibility that Chieftain can win more contracts than assumed by the City (it has already won all the tenders it has fought.)

House broker Brewin Dolphin forecasts a jump in profits from £700,000 to £1.3 million in 2006, a figure that is based on turnover more than doubling to £34 million, thanks to a maiden turn from engineering services. Next year, profits of £1.5 million could be on the cards.

Those estimates mean the shares are trading on just over 14 times this year’s forecast earnings, falling to just over 12 times for the following year. As the volatility of the business continues to reduce, we think these ratings are undemanding. Investors should note that the shares yield around three per cent and there is scope for a steady increase in the dividend. That makes the shares attractive in terms of both growth and income. Buy.