The cost, efficiency and environmental benefits offered by GTE’s turbine-cleaning services helped the company double sales in 2008, and even prise US$10 million from institutional investors. Oliver Haill reports...

Gas Turbine Efficiency (GTE) is an Anglo-Swedish group growing at a supercharged rate. It provides equipment and services that clean and improve the performance of industrial turbines, thereby increasing customers’ fuel and operating efficiency and providing environmental benefits.

GTE grew sales more than sevenfold to US$17.8 million (£12.2 million) in the four years to the end of 2007 and 2008 saw no let-up in the company’s high-speed expansion, as it doubled sales to $35 million and achieved its first pre-tax profit as a listed business.

Its growth potential has lured a heavyweight management team away from a host of the world’s foremost engineering companies, and last year, with the funding market as near as shut for smaller companies, GTE managed to prise a net $10.1 million (£7.1 million) of cash from institutional investors.

Motivation for joining the GTE growth story, both for management and the group’s new backers, is strong, since the company still only speaks for a small portion of a growing $10 billion-a-year market in which the technological entry barriers are very high.

Furthermore, in economic conditions both fair and foul, demand for GTE’s services has held up, driven by the group’s ability to cut fuel costs and extend the life of turbines, which are expensive pieces of machinery. This demand is intensifying on the back of legislative pressure to cap carbon emissions in both the EU and the US.

Despite its express growth, however, GTE has remained largely ignored during its four years on AIM and in December its share price weakened to an all-time low. However, this presents investors with an opportunity to buy into a fast-growing business at a very favourable price.

Strategy
GTE was set up in 1988 by a Swedish aircraft engineer as a provider of cleaning systems to the likes of Finnair and the Swedish and Finnish air forces. The company was bought out in 2001 by US venture capitalist EIG. It retained a majority stake after appointing CEO Steven Zwolinski and floating the group on AIM in 2005 in a $9.3 million IPO. 

UK-registered and with offices in Stockholm, Russia and across the US, the company has expanded its focus from aircraft engines to turbines found in power stations and in generators and compressors for offshore oil and gas platforms. As well as turbine cleaning, GTE offers a range of services to improve and monitor the efficiency, lifespan and environmental performance of gas turbine systems.

Typically focused on large customers, the company sells via OEMs (original equipment manufacturers) such as Pratt & Whitney, Rolls-Royce, Siemens, Caterpillar and General Electric, as well as (increasingly) direct to end-users including United Airlines, oil producers including Chevron and utilities such as E.On.

In 2008, sales through OEMs fell from around 80 per cent to around 70 per cent. Zwolinski foresees this figure ending up – to the benefit of margins – at around 50 per cent.

Being small and mobile, yet with all the expertise of an OEM, GTE has a strong competitive edge. ‘We tend to move faster than the big OEMs and, added to our technology, that’s where we compete. In comparison, we have lower overheads so we can offer a lower price and higher quality.’ 

Management
Zwolinski spent more than 20 years at General Electric (GE), eventually leading its Europe-based GE Hydropower arm and finally taking control of its new GE Wind division in 2002. He has since assembled a heavyweight team, most of whom also built their industry reputations at GE. The top 20 people in the company’s management have amassed a combined 500 years’ experience – giving this minnow a ‘wisdom-per-capita’ clout equal to the largest multinationals.

Chief technical officer Tom Wagner was general manager at GE Wind and is described as ‘a deeply technological guy’. Chief financial officer Magnus Nordgren has worked in a number of different countries and was most recently market research group ACNielsen’s finance chief for the Nordic region. The non-executive directors include chairman John Bryant, a veteran of the corporate scene with British Sugar, Drexel and, lately, US-based electricity and gas utility provider Cinergy.

Prospects
Despite sharp global downturn, GTE continues to demonstrate its defensive attributes, and strong growth is predicted as turbine operators try ever harder to reduce operating costs.

Furthermore, the added gloss of the environmental enhancements that the company’s technology can provide will soon turn into necessity, as the EU’s Emissions Trading Scheme – affecting all flights to or from EU airports – comes into force in 2012. There is also the likelihood of similar schemes in the US. The EU scheme this year set out an obligation for member states to put in place appropriate legislation within one year.

GTE’s recent numbers have been positive, with the company having moved into profit during the first half of 2008, making $367,000 before tax from turnover of $14.7 million. Unfettered by debt, GTE finished the period with $7.9 million of cash and cash equivalents on the balance sheet.

In its latest trading update for 2008, GTE informed the market of further progression in the second half-year, leading to an annual turnover increase of 96 per cent to around $35 million – well ahead of market expectations. Within the aviation sector, sales from GTE’s exclusive supply agreement for engine-maker Pratt & Whitney’s EcoPower cleaning service grew by 228 per cent and other contracts were secured with Singapore Airlines, Southwest Airlines and United Airlines, as well as with some unnamed air forces.

New product lines in particular helped to fuel growth in the industrial division (serving the power generation and oil and gas markets), helping customers deal with higher fuel prices, tightening emissions standards and movements to alternative fuels.
Future growth prospects are underpinned by further expansion into new markets such as Asia, India and the Middle East, while the long- and medium-term aim, says Zwolinski, is to move GTE ‘further up the value chain’.

Valuation
Given the long-term drivers of growing global demand for power and aviation, the resilient market in which GTE operates is only going to get bigger, a fact that seems at odds with the 60 per cent slide in the company’s share price in the past two years. Indeed, a 15-year discounted cash flow analysis performed by Matrix Corporate Capital suggests that the shares should be trading at 46p.

Moreover, GTE began 2009 with an order backlog of $24.7 million, 286 per cent above 2007’s $6.4 million, leaving house broker Collins Stewart confident that sales should reach $47 million and pre-tax profits $5.1 million in 2009.

When they are unveiled in April, the results will prove that 2008 was a breakthrough year for GTE, with the company making maiden annual profits. For 2009, earnings of six cents, or 4.1p, per share are forecast, placing the shares on a prospective price-to-earnings ratio of less than six times. That discounted rating makes no allowance for the likely continuation of GTE’s excellent growth rates.

Furthermore, having reached revenues of $35 million and moved into the black, GTE is at something of an inflexion point and it is only a matter of time before a rerating of the business takes place.