GTE’s turbo-charged growth

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

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 while providing environmental benefits to boot.

GTE grew sales more than sevenfold to $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 their ability to cut fuel costs and extend the life of these 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. Having demonstrated its ability to save them money while improving the efficiency of their  engines, 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 generators and compressors for offshore oil and gas platforms, as well as the largest turbines of all – those found in power stations.

GTE’s patent-protected technology produces water torrents at high pressure to achieve the tough task of cleaning the blades of turbines without damaging them. Around this and associated technology, GTE offers a range of services to improve and monitor the efficiency, lifespan and environmental performance of gas turbine systems.

By having a clean turbine, a GTE customer can save anywhere between one and 1.3 per cent of its fuel costs, which equates to rather a lot if you are buying around $1 billion worth of fuel a year, while also ‘significantly' lowering CO2 emissions. According to Zwolinski, GTE has added to its offering by introducing new equipment, and following ‘two and a half’ acquisitions has a globally filed pipeline of ’20 to 25 patents coming through’.

‘Product development is crucial to our progress,’ explains Zwolinski. ‘Forty per cent of our sales last year were from products that had been developed in the past year. We’re not selling just engineering services,’ he enthuses, ‘but engineering solutions – monetising our technology.’

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 2007, around 80 per cent of sales were achieved through OEMs; in 2008 this percentage fell to around 70 per cent and Zwolinski foresees this figure ending up – to the increasing 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. If people have a problem and no one else can solve it, they use us. Also, in comparison with the big OEMs, we have lower overheads so we can offer a lower price as well as higher quality.’  

Management

Considering its size, GTE boasts considerable experience in terms of its management team. Joining General Electric (GE) in the early 1980s, armed with an MBA and a degree in mechanical engineering from Rensselaer Polytechnic Institute, Zwolinski went on to stay at the industrial behemoth for more than 20 years. Working his way up, he eventually came to lead its Europe-based Hydropower arm and finally take control of its new Wind division in 2002.

Having been ensnared by GTE’s growth potential in late 2005, Zwolinski has since assembled a heavyweight management team. And, like him, most of the senior team built their industry reputations at GE.

In fact, 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. Indeed, as Zwolinski says, ‘Because this is a very risk-averse industry, having guys on the team who are seen as the “gurus” helps us win contracts.’

Chief technical officer Tom Wagner is just such a figure, having worked at GE for 31 years – even longer than his boss. The first man Zwolinski drafted in, he was his general manager at GE Wind and is described as ‘a deeply technological guy’.

Around Wagner, the senior management team represents a veritable smorgasbord of turbine engineers and associated commercial specialists from the big industrial names, with a good sprinkling of ex-GE men augmented by others from Siemens, Pratt & Whitney, Dynergy and Exxon-Mobil.

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.

On the non-executive side, GTE can call upon the experience of chairman John Bryant, a veteran of the corporate scene with British Sugar, Drexel and, lately, US-based electricity and gas utility provider Cinergy. Non-executive director Charles Cameron is a banker and former chief executive of AIM-listed In Technology, while Otto Lagarhus is an aviation consultant and former director general of the Norwegian Civil Aviation Authority.

Prospects

Despite sharp global downturn, GTE continues to demonstrate its defensive attributes, and Zwolinksi is not worried about potential dark clouds on the horizon. ‘We haven’t seen any effects of the credit crunch on the services side – everyone’s very busy. On the new-units [installation] side, which represents only ten per cent of our business, there is talk that an “air pocket” might come down the line, but we’ve not seen it yet.’

Strong growth is predicted as turbine operators try ever harder to reduce operating costs as recession bites.

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 landing or taking off from EU airports – comes into force in 2012. There is also the likelihood of similar schemes to come from the Obama administration. 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 and achieved across buoyant aviation, power generation and oil and gas markets.

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, buoyed by an $8 million order in the second half for further global infrastructure expansion. 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). Here, GTE is increasingly selling ‘solutions’ to oil and gas and utility companies to help them deal with higher fuel prices, tightening emissions standards and movements to alternative fuels.

Last year, as well as receiving a first order from an oil and gas customer in Kazakhstan, approvals were granted by a Russian OEM for the use of GTE technology on its turbines and by Abu Dhabi National Oil for the company’s compressor cleaning solution.

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’. There is good scope to achieve this in the expanding industrial market in particular, where there is a requirement for many more applications of GTE technology and its added-value services.

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. ‘Based on our estimates,’ the broker said, ‘the current market price of 23p per share only reflects seven to eight years of cash flow.’

Moreover, GTE began 2009 with an order backlog of $17.5 million, 173 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 officially 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 6 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.