Last week’s AGM Trading Update from Pressure Technologies (LON:PRES) was really quite positive and certainly enough for me to re-rate its investment appeal over the next couple of years. One broker is even saying the shares could almost double from here.
The group stated that as a result of an increasing order book, notwithstanding the current economic climate and cost-inflationary pressures across its operations and supply chains, it remains confident in meeting full-year market expectations.
This company, which was founded in 1897 and eventually floated on AIM in 2007, is a leading designer and manufacturer of high-pressure systems serving the global supply chains in the oil and gas sectors, the defence equipment makers, the market for industrial gases, as well as that for hydrogen energy.
The Business
Today it has two main divisions: precision machined components (making up 25.3% of group sales); and cylinders (making up 74.7% of 2021’s £25.3m sales).
The group sees the UK providing 71.1% of its sales, while it also sells to France 4.6%, Romania 3.6%, US 3.2%, Italy 3.1%, Switzerland 3.0%, Germany 2.4%, Norway 1.3%, Rest of Europe 1.4%, South Korea 1.2%, and the Rest of the World 4.3%.
Cylinders
The main subsidiary is the Sheffield-located Chesterfield Special Cylinders company, which has been a leader in the design, development and manufacture of high-pressure seamless steel gas cylinders for over 100 years.
It is one of only five companies across the world that can compete for ultra large cylinder contracts.
The company’s high-pressure cylinders are a critical component for a number of end applications from defence submarines to oxygen cylinders in fighter jets. They are also used for the bulk storage of gases to ultra large air pressure vessel systems used for motion compensation on floating oil platforms.
The group is a key supplier to the growing hydrogen sector, providing complete storage solutions and asset management. It has recently won contracts globally with various NATO navies. Whilst the increase in the use of hydrogen fuelled buses means that its systems are in use and demand across Europe.
CSC has long-term contracts to supply bespoke products and services for the key submarine build programmes and for surface vessels such as the Type 26 Hunter class Frigate, and for the Astute, Dreadnaught and Barracuda classes.
The current defence spend is being driven by the need to update aging warcraft and pressure from the US for NATO allies to increase defence spending. It also works upon contracts for the Australian and Canadian navies.
On the fast-improving hydrogen side clients include Shell Hydrogen, TotalEnergies, Iberdrola, McPhy, Arcola Energy, Framatome, Plug Power, Haskel Hydrogen Group and ITM Power.
In 2013 it set up a German based operation to serve the defence, renewables, transport and storage sectors across mainland Europe and Scandinavia.
To handle the increase of its capabilities the company has recently spent £1m plus in a machining centre, shot-blasting facilities and a UT scanner for its Sheffield manufacturing site.
This main subsidiary also has a spin-off operation, Integrity Management, using the CSC unrivalled industry knowledge and experience. It is a growing part of the business offering its services where cylinders cannot be removed for routine maintenance and are inspected and certified ‘in-situ’.
IM is the principal provider of inspection and testing services to the MoD for ongoing cylinder performance and safety management on the Astute, Vanguard and Trafalgar classes of nuclear submarines.
Precision Machined Components
The side of the business is a leader in its markets, with world-class lead times, highly specialised precision engineering skills and a blue-chip customer base. Top names such as BAE Systems, Naval Group, Rolls Royce, Babcock, CDWE, and ThyssenKrupp.
Serving the oil and gas market, these businesses specialise in supplying key high integrity components, made from super alloys, manufactured to exacting standards and tolerances.
Those special components are destined for extreme or hostile environments, such as deepwater and subsea oil exploration and also for wear parts for offshore and onshore oil production.
The Equity
There are some 31m shares in issue.
Large holders include Schroder Investment Management (26.20%), Harwood Capital (13.83%), Premier Miton Group (8.30%), James Sharp (5.42%), Gresham House Asset Management (5.00%), Hargreaves Lansdown (4.74%), Interactive Investor Trading (3.89%) and AJ Bell Securities (3.71%).
Recent Results
For the year to 2 October 2021 the group reported sales of £25.3m (£25.4m) and a reduced pre-tax loss of £4.2m (£20.0m).
In the year it did reduce its net debt from £7.4m to just £4.9m.
Order books at five-year Highs
At last week’s AGM the group announced that the overall order books for the cylinders side were standing at their highest level for over five years, boosted by high-value defence contracts.
The oil and gas sectors were starting to show some turnaround too, with steadily improving enquiry and order intake levels, especially from its Schlumberger, Halliburton, Expro and Baker Hughes OEM customers. Its orders were at the highest since August 2020.
Broker’s Views
Analyst Richard Hickinbotham at Singer Capital Markets, rates the shares as a ‘buy’.
He estimates that the current year to end September will see £29.5m of sales and a return to adjusted pre-tax profits of £0.9m (£1.1m loss), worth 2.9p (-2.2p) in earnings per share.
For next year he has pencilled in £34.0m revenues and £2.0m of profits, worth 6.4p in earnings.
For this year he sees net debt falling to £3.6m, then to only £0.9m next year. Singer has a 90p a share price objective, which I consider is far too low. Perhaps they are waiting for the half-time figures before revising their estimates.
Over at VSA Capital, their analyst Phil Smith, is very enthusiastic about the group’s hydrogen energy market opportunities, which could present significant future upside.
He states that the group is in ‘turnaround’ and creating a clear path to profit.
He has put out a ‘buy’ note, with a price objective of 175p on the group’s shares.
My View
Although its shares still have to go some way to achieve the price aim of my first Profile on this group, they did actually touch 143p in February 2020, just before Covid-19 devastated the market and British industry.
However, my subsequent Profile scored a 52% return within three months.
The interim results will be announced in June.
Now I am suggesting that this group’s shares, which closed at 88p on Friday night, are ready for another good run upwards this year.
My new Target Price is a very easy 110p.
(Profile 17.06.19 @ 117p set a Target Price of 170p)
(Profile 04.12.20 @ 71p set a Target Price of 100p*)