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Mining services companies cannot take a trick as commodity prices fall further and large clients squeeze small providers. It is a different story in infrastructure services as expectations slowly build for stronger demand as governments finally invest in new projects.

Service providers to the infrastructure sector are reporting more momentum in the sector, or signs of improved conditions after several project delays in FY14 and mostly likely the first half of FY15. It’s still early days and government infrastructure projects have a habit of taking longer, or being pulled because of politics, as with the proposed East West Link in Melbourne.

Engineering service firms with strong infrastructure exposure appeal over the medium term. Business forecaster BIS Shrapnel estimates $180 billion in non-resource infrastructure construction over the next five years. That should eventually create plenty of work for engineering service providers with prominent East Coast operations.

This column identified Brisbane-based infrastructure services provider Seymour Whyte in November at $1.50 after heavy share price falls. It has fallen to $1.38 after reporting softer earnings guidance because of transport infrastructure project delays, and amid a weakening market sharemarket in the past month.

Chart one: Seymour Whyte

Source: ASX

Seymour said it expected stronger growth in FY16 as prospective new infrastructure projects in Queensland began. It said conditions in the utilities infrastructure sector remained buoyant. Seymour looks oversold given its project pipeline and potential to win more work as infrastructure spending builds up

OTOC heads in other direction

As Seymour fell, another service provider, OTOC Ltd, rallied from 10 cents in July to a 52-week high of 24 cents in September, before easing to 18 cents. OTOC specialises in the installation of mine-site and remote-area infrastructure for government and resource projects. Its Whelans Consulting division specialises in surveying, town planning and aerial mapping for mining, infrastructure, construction and land subdivision projects.

Chart two: OTOC

Source: ASX

OTOC’s big news was the acquisition in November of infrastructure surveying firm Geo-Metric Surveying for up to $12 million. Established in 2001, Geo-Metric is an expert in complex infrastructure projects such as railways, tunnels, roads and bridges. It has excellent leverage to the expected increase in civil infrastructure spending in the next few years, and a blue-chip base of large infrastructure clients that are expected to dominate project construction.

OTC a Perth-based company, said in late November: “The acquisition provides OTOC with specialist infrastructure surveying capabilities and exposure to the substantial infrastructure investment underway and forecast for the East Coast of Australia in the next five years.” The acquisition is expected to be earnings-per-share accretive in FY15.

The market applauded the acquisition and OTOC rallied. It looks a timely, well-priced acquisition but the bigger potential prize is OTOC’s strategy to create a premium national surveying company to service the property, civil infrastructure and resource sectors. Having acquired Geo-Metric, it is scanning several acquisition targets for its surveying business.

It’s an interesting strategy. OTOC’s market is fragmented; many small firms contesting narrow geographic or specialist markets. Having national operations across infrastructure, surveying and town planning creates synergies and diversifies the company’s geographic and divisional earnings.

OTOC is attracting more attention from leading fund managers. Paradice Investment Management, one of the better judges of small-cap stocks, lifted its stake from 6.4 per cent to 7.6 per cent in late November. Acorn Capital lifted its stake slightly to 10.4 per cent in October.

Capitalised at $47-million, OTOC suits experienced investors who are comfortable with higher risk micro-cap stocks. Industry-consolidation stories can be compelling, but plenty of micro-cap companies have come undone from being too acquisitive and through poor implementation of new businesses.

Nevertheless, OTOC is worth watching. It has the balance sheet to make further small acquisitions, a good position in the surveying market, and potential to grow rapidly by consolidating other firms – at a time of significant growth in infrastructure spending over the next five years. A return on equity above 20 per cent in the last three financial years is another attraction.

After more than doubling in two months, OTOC is due for a longer share-price consolidation or pullback. That could be a catalyst to buy one of the market’s more interesting micro-cap industrial companies.

Tony Featherstone is a former managing editor of BRW and Shares magazines. Readers should do further research of their own or talk to their financial adviser before acting on themes or ideas in this article. This column does not imply recommendations. All prices and analysis at December 12, 2014.