After significantly diversifying its business over the last few years, Pressure Technologies' (PRES) profits are tipped to surge, but the shares factor in little of this and look ridiculously cheap.
- Profits growing fast
- Record oil & gas industry spend
- Cash for acquisitions
- Biogas unit has huge potential
- Low cost Asian competition
- Limited visibility in places
The company has been making seamless steel cylinders under the 'Chesterfield' brand for over 100 years and is a leader in its field. Last year this division still accounted for the majority of the business generating just over half group sales and about three quarters of profits. The division was also largely responsible for a tripling of the first-half pre-tax profit to £1.3m on the back of 30 per cent sales growth to £16.4m, thanks to better than expected sales of huge high-tech cylinders for motion compensation systems on deep water drill ships. Defence was strong as well and sales in this part of the market doubled to £1.8m, so overall, the cylinders order book rose by a third.
The engineered products division is a new addition to the group and provides important diversification. It was formed through the acquisition of two oil & gas equipment businesses, Al-Met and Hydraton, in 2010 and represented 46 per cent of last year's sales, although, management issues in the US and weak trading conditions at Al-Met held back profits. However, the current year is looking good with a "dramatic", on-going, second-quarter increase in sales at Hydratron reported while huge investment in deep water drilling is good for Al-Met. Looking further to the future, there’s serious untapped potential in the fracking industry, too.
The final part of Pressure Technologies' business is its biogas operation that was set up in 2008. While it accounts for less than one per cent of sales and is loss making it could prove a potential sleeping giant. It specialises in 'upgraders' which strip out unwanted gases from biomethane, so it’s fit for the national gas grid. Progress has been slow, but UK authorities have just given the all-clear and Mr Hayward expects "an immediate bulge in work".
PRESSURE TECHNOLOGIES (PRES) | ||||
|---|---|---|---|---|
| ORD PRICE: | 187p | MARKET VALUE: | £21m | |
| TOUCH: | 184-190p | 12-MONTH HIGH: | 191p | LOW: 153p |
| FWD DIVIDEND YIELD: | 4.3% | FWD PE RATIO: | 8 | |
| NET ASSET VALUE: | 145p | NET CASH: | £2.7m | |
| Year to 29 Sep | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 21.7 | 3.51 | 22.3 | 7.20 |
| 2011 | 23.1 | 0.58 | 6.18 | 7.20 |
| 2012 | 30.4 | 1.78 | 12.5 | 7.50 |
| 2013** | 31.8 | 2.30 | 16.5 | 7.80 |
| 2014** | 35.5 | 3.20 | 22.7 | 8.10 |
| % change | +12 | +39 | +38 | +4 |
Normal market size: 200 Market makers: 5 Beta: 0.2 *Underlying EPS figures **Charles Stanley estimates | ||||
An increased contribution from services work, which is three times as profitable as manufacturing, also has the potential to boost earnings. Management is looking to move from a 25:75 services to manufacturing profit split to 50:50. A strict new testing regime for gas tubes will help, as Pressure Tech is the only company in the world that can do it.
Low-cost rivals in the Far East affect pricing, but they lack the quality to compete away from home. Meanwhile diving support and motion compensated winch systems should offset an anticipated drop in oil rig projects, too. And both record order books at subsea majors and significant scope to increase market share should cool concerns about limited engineered products order visibility.
