Cylinders specialist Pressure Technologies is anything but a blue-sky investment – its profitability and healthy organic growth rates are solid fundamentals for value investors to latch onto, says James Crux

Sheffield-based cylinders specialist Pressure Technologies is an established ‘real’ engineering business. Highly profitable and growing fast organically against the backdrop of a still-buoyant oil and gas sector, the company should appeal to value investors. And its recent entry into the emerging biogas market only adds to its investment appeal.

Debuting on AIM in the summer of 2007 with an initial market value of £17 million, the company attracted £6 million (before expenses) through an oversubscribed placing at 150p. Its shares have performed well in spite of wider stock market falls, with investors recognising its high growth rates, forecast-beating financials and increasing earnings diversity.

A further tick in the box is Pressure Technologies’ balance sheet strength, which leaves the company well placed to exploit acquisitive opportunities at very attractive prices, as reality creeps into vendor pricing expectations. Even after its strong relative share price performance on a bowed AIM, the company still trades at a very attractive entry level.

Strategy
Pressure Technologies is a niche manufacturer of high-pressure seamless steel gas cylinders – through its Chesterfield Special Cylinders (CSC) business – for markets including oil and gas, naval, defence, transport and ground storage.

CSC was formed in 2004, following a management buy-out (led by Pressure Technologies CEO John Hayward) from its German parent company, and the Chesterfield brand is actually synonymous with specialised cylinder manufacturing.

The cylinders, designed and made by Pressure Technologies, typically require a high degree of design and technical specification, so track record and know-how form a high entry barrier.

The group also refurbishes and re-tests such cylinders for the UK and other global markets. Products are split into two categories – ultralarge cylinders and aircraft cylinders.

On the ultra-large side, the company’s high-pressure steel cylinders form an integral part of an oil rig’s motion-compensating system, and Pressure Technologies is the largest global supplier of air pressure vessels for floating offshore platforms.

In the naval sector, the company has supplied the Royal Navy with high-pressure gas storage cylinders for submarines and surface vessels since the 1930s, while other navies around the world (including France, Spain and Canada) are also taking advantage of the group’s expertise.

Pressure Technologies also supplies ultra-large trailer cylinders, which are used to carry gases efficiently at high pressure by road. And in the aircraft sector, the company’s cylinders are used in both military and commercial applications, ranging from backup breathing air for pilots to fire-fighting systems.

‘The oil and gas sector is our biggest market,’ summarises the enthusiastic Hayward.‘We sell to the people who make motion compensation systems and they then sell them to the people who build rigs. But we also supply products into defence, the industrial gases sector and the trailer market, and we’ve even done some work for the Indian space programme. Oil and gas is where our recent growth has come from, but five years ago that growth was coming from defence and industrial gases.’

Pressure Technologies came to AIM with a clear growth target – to become a £40 million turnover concern within five years.The company looks on course to achieve this, keep growing in its core energy and high-pressure gas sectors, and diversify its earnings through moves into new niche markets.

November’s signing of a co-operation deal with New Zealand-based Greenlane Biogas, the world leader in upgrading raw biogas into vehicle-quality fuel, represents such a move. Under the terms of this tie-up, Pressure Technologies now has the exclusive rights, through its new Chesterfield BioGas division, to market Greenlane’s globally renowned equipment in the UK and Ireland.

The group will now look to develop the UK market for biogas cleaning equipment, which provides clean biomethane suitable for use as a vehicle fuel or for injection into the natural gas grid.

Management CEO John Hayward, a trained accountant with a physics degree from Oxford, is the driving force of the group, having held a number of roles with the company before he led the MBO in 2004. In his early days,Hayward gained invaluable experience in roles with Boots, United Engineering Steels and Courtaulds.

Overseeing developments from the nonexecutive chair is Richard Shacklady, who joined the business at the time of the buyout and brings a deep pool of engineering experience to the table. Prospects In December, Pressure Technologies posted outstanding figures for the year to September, beating analysts’forecasts and reflecting record exports to the oil and gas sector as well as the winning of overseas defence deals.

Turnover increased by a very healthy 57 per cent, from £15.1 million to £23.7 million and pre-tax profits surged ahead dramatically from £1.4 million to £5 million, ahead of the house broker’s already-upgraded forecast for the year.

Earnings growth from 10.9p to 31.6p was similarly eye-catching and enabled management to announce a maiden 4p final dividend, giving a 6p total for the financial year, ahead of the City’s 5p prediction.

The company closed the year with £5.9 million of net cash in the coffers, having increased its cash balances by £1.2 million during the period and reported a record order book of £23 million.

A highlight of the results was the fact that non-oil-and-gas-related sales were on the rise, ranging from new submarine contracts to trailer orders and diving support deals, which reflects growing diversification.

Though the business is still weighted towards oil and gas, with 85 per cent of last year’s sales having arisen from that sector, the proportion is falling as it only makes up two-thirds of the order book.

Order levels and the overall outlook in oil and gas still look strong and should be unaffected by the recent oil price pullback, since rising levels of investment in deep-water rigs and drill ships began when the oil price was at $50 and below.

‘We aren’t concerned that the market is going to drop off. Oil and gas has held up well, and the reason is that you don’t just order a rig and build it within three months,’ explains Hayward.

Over in biogas, there is a very significant market opportunity, asserts Hayward, with potential clients ranging from waste management and water treatment companies to large commercial farmers and waste food processors.

‘Biogas is the real opportunity for us,’ he enthuses,‘and that is why we’ve set up a separate division for what is potentially a multimillion- pound business. We won’t make any revenue from biogas business this year, but we are looking for first sales in 2010.’

Prospects are also underpinned by potential acquisitions in related ‘niche’sectors, while ongoing investment in R&D programmes should foster longer-term growth.

Valuation
Following last year’s emphatic performance, house broker Brewin Dolphin upgraded its 2009 pre-tax forecast by four per cent to £5.3 million, despite leaving its £25 million sales estimate in place.

This suggests recent margin strengthening is likely to continue this year, even allowing for increasing investment in Chesterfield BioGas. Forecasts for 2010 point to further profits progression to £5.7 million from a top line of £27 million, giving a rise in earnings from this year’s 33.5p to 36p per share. Based on these numbers, shares in Pressure Technologies trade on forward p/e ratios of 6.9 and 6.4, which are very undemanding considering the growth the business is expected to achieve.

These multiples also represent a significant discount to broadly similar industrial peers with an energy services bent, such as Rotork and Spirax, and a rerating of the shares to even a modest multiple – perhaps 11.5 times 2009 earnings – would result in a share price of 385.25p; so there should be very significant upside for investors in more benevolent market climes.

Finally, income investors will note that, for the next two years, Pressure Technologies offers a respectable yield of three per cent and 3.5 per cent, based on the broker’s 7p and 8p dividend estimates.