Aim Listed Pressure Technologies

In these harsh times, it’s good to speak to a businessman who is happy with life. ‘Round here’, John Hayward told me, ‘manufacturers are doing pretty well. Not, of course, if they are supplying the building trade. But if they are exporting, they are doing fine.’

‘Round here’ is Sheffield. John is chief executive of Pressure Technologies, a company that came onto AIM last May and has been on a roll ever since. Its share price has more than doubled in that time. And after excellent interim results a fortnight ago, broker Brewin Dolphin has hiked its earnings forecasts for this year and next by about 20%.

If you wonder why I’ve spent the last thirty years researching and investing in small cap companies, then it’s because of great little stories like this. Pressure Technologies is exactly the sort of company that could end up in my Red Hot Penny Shares portfolio. It’s certainly one that’s on my watch list for the future.

So what’s the secret? Let’s take a look…

First and foremost, perhaps, don’t sell to customers in this country. Over 80% of Pressure Technologies’ £11.7m of first half sales went to export markets.

A canny way to play the oil boom?

One customer group in particular is making this a good time for a company that traces its origins back to 1897 and the grand old Victorian name of The Universal Weldless Steel Tube Company Limited. That customer group is the oil industry to which Pressure Technologies is the world’s largest supplier of high pressure seamless gas cylinders.

Thanks to the boom in oil exploration, shipyards have been turning out new off-shore drilling rigs just as quickly as they can make them. These rigs are equipped with ‘ultra large’ gas cylinders from Pressure Technologies. Thanks to demand from this quarter, Pressure Technologies’ sales have tripled in three years and taken its share price from 150p at the time of its AIM flotation last May to 300p today.

But as Hayward told me, ‘like any boom this one will come to an end’. And with the first signs of overcapacity just starting to appear in the off-shore market, Hayward’s main challenge over the next few years will be to replace this business as it levels out.

Positioning itself for a new trend…

With Pressure Technologies expected to make a £4m pre-tax profit and to finish the year with £5m of cash in the bank, Hayward is facing this challenge from a position of strength. And he has already identified an opportunity in the field of compressed biogas.

Biogas is produced from the waste water treatment and the anaerobic digestion of organic waste. On the Continent this methane gas is purified so that it can be used to power municipal vehicles, but in the UK it is only burnt in combined heat and power plants. Hayward knows that Pressure Technologies can make the gas storage cylinders and is hoping to offer a complete service, taking, cleaning and storing the gas to be used as vehicle fuel.

This is one initiative that Hayward is pursuing in his ambition to expand the size of what has always been a small market. There are only a handful of manufacturers of specialized high pressure cylinder makers in the world. But the technical and safety demands and the requirement to integrate cylinders into other industrial systems means that suppliers work closely with their customers.

Extending its services

This close working relationship with the customer and the technical demands of storing gas at high pressure have enabled Pressure Technologies to extend its services. One use of high pressure cylinders is for the transport of gas on trailers where they are connected to a network of pipes. These systems must be refurbished from time to time. Pressure Technologies used to simply deal with the cylinders. But it now takes the whole trailer, dismantles it, and while the chassis is sent to a sub-contractor, it refurbishes all the cylinders and pipe work before reassembly.

In a similar extension to its manufacturing core, Pressure Technologies is hoping to provide on-site testing for cylinders on oil rigs. It also has a steady stream of work from retesting, reconditioning and re-certification of cylinders that generally need to be checked every ten years, or five if they are used to hold highly corrosive or toxic gases. .

Pressure Technologies buys semi-finished cylinders from some of its competitors that have surplus capacity. It then resells these to customers after some limited finishing and inspection, but outside the oil and transportation sectors its cylinders are mainly found in the aircraft and on board ship.

Aircraft cylinders need to be small and light and are used for breathing apparatus for pilots, pneumatic applications for emergency systems and fuel tank explosion prevention systems. On board ship – and Pressure Technologies is the exclusive supplier to the Royal Navy – applications range from back-up breathing systems to nuclear reactor valve operating systems. In this area Pressure Technologies has just won a £3m order for the French navy’s Barracuda submarine programme, in a contract that will be delivered over seven years from 2010.

Cashing in on the weak pound and falling steel prices

Pressure Technologies, which was the subject of a management buyout team in 2004, is now benefiting from the weakness of sterling relative to the euro. It’s also being helped by the slipping price of its key raw material, steel.

Such has been the boom in Pressure’s business that broker Brewin Dolphin has raised its profit forecast five times since flotation. This could yet happen again. But with the shares now trading at about twelve times projected earnings for 2009 and the end of the rig building boom probably in sight, my feeling is that the shares are high enough.

Nevertheless, I’m keeping this superstar small cap share firmly on my radar. If you’re already subscribing to my Red Hot Penny Shares newsletter, then you may well hear more about this in the future. I’ll let you know if and when it’s time to buy…

If you’re not already reading Red Hot, then check out my latest favourite small cap pick. You’ll discover how the "Leinster Profit Secret" propelled one stock 10,800% in five years - and how you can harness the true profit potential of penny shares. You can read all about it by clicking here.

Best regards,

Tom Bulford
For The Penny Sleuth

P.S. If you want to follow the tales of a small company investor, and uncover the hidden gems of the stock market, then sign up for the Penny Sleuth e-letter. It won’t cost you a penny…

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Aim Listed Pressure Technologies

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