I’ve been looking for a company which has been improperly hurt by the Fukushima Daiichi nuclear disaster, and I think GSE Systems (GVP) is one such company. GVP is a microcap (~$45m market cap, $25m EV) which is not suitable for large investors, but I think there is upside to $3.40 or higher (50%). The company agrees as they have been actively buying back stock, and an energy focused PE firm has recently taken a large stake as well.
GVP is a provider of simulation, educational, and engineering solutions and services to the nuclear and fossil electric utility industry and the chemical and petrochemical industries. If we flash back to February 2011 before the tsunami in Japan, the stock was trading in the $3.50-$4.00 range, had recently named a new CEO, and was on a path to diversify their traditional nuclear related revenue. They had purchased a few smaller companies, TSE Engineering Consultants and EnVision Technologies, which further diversified their revenue into new industries (oil & gas and chemicals) and new products (training).
The company then reported weak Q4 2010 results when they took a loss on a large contract in the UK, the Tsunami followed, and the stock was almost cut in half to $2 per share. However, management has seen no effect on their backlog or contracts or even new business as a result of the disaster and business is actually quite strong.
Diversifying away from Nuclear
A quick word on the Nuclear industry world wide. While China initially paused any plans for new nuclear plants that had not already started being built as a result of the tsunami, they have since restarted new building. New leadership in Japan has committed to Nuclear as an energy source. Germany appears to be in the process of shutting down their nuclear industry by 2022. In the US, nuclear has taken a backseat to natural gas since it is so cheap. GSE has actually been diversifying revenue away from nuclear for some time now, I don’t see nuclear energy disappearing. Now you’re probably not going to buy GVP without a non-negative view on nuclear, but here’s the % of nuclear revenue for the past few years:
Q1 12 62%
AP1000 Nuclear Reactor
GVPis the default simulation provider for Westinghouse’s AP1000 nuclear reactor, the standard for new construction throughout the world. I have a contact at Westinghouse who didn’t even realize that a third party had developed the simulators. It’s estimated that over 50% of new reactors built for the foreseeable future will use the AP1000 design, which is quite positive for GVP’s nuclear business. The two reactors currently under construction in the US are AP1000 designs and GVP is developing the simulators (and recognizing revenue since they book on a % of completion method) for both of them.
While the AP1000 is the standard for large nuclear power plants, GVP is also working with NuScale, which is trying to develop a smaller one. This company has an interesting past including being capitalized by a ponzi scheme that you can read all about on the wiki page. The good news for GVP is they were recapitalized by Flour, the A/R that GVP had written off was repaid, and they’re moving forward with new business with NuScale.
GVP has a great balance sheet with over $17m of unrestricted cash (almost $1/share) and another $5m of restricted cash used to collateralize lines of credit. They have been using their balance sheet to buy back stock. The company announced a share repurchase shortly after the Tsunami and has since bought back 986,781 shares for $1.9 million or $1.93 per share, representing about 5% of shares outstanding. As management stated on their Q2 2011 call: “We believe that at current levels, shares of GSE stock are an attractive long term investment opportunity, we will continue utilize our strong cash position to purchase shares as part of comprehensive programs to enhance the value of GSE for its shareholders.”
Both Q4 2011 and Q1 2012 earnings were fairly strong, with revenue showing growth, backlog starting to grow again, and revenue being diversified away from nuclear. The EnVision acquisition is starting to show some traction which is important since it comes at a gross margin level over 2x the company average. Q4 was added by a change order from a British utility and it showed great operating profit. Q1 was hurt by their work on the Slovakian plant Mochovce. Work on the plant was stopped due to plant design changes, and while this has the potential to increase revenue in the future, there is probably more concern in the market about the $5+million receivable related to this project (the project total value was almost $25m, with $16m coming from low margin hardware sales).
An energy related private equity firm, NGP Energy Technology Partners, recently has taken an almost 15% stake and was asked to join the board. According to their website, they “[invest] equity capital for growth and buyout transactions in companies that provide products and services to the oil and gas, power, energy efficiency, and alternative energy sectors. Founded in 2005, NGP ETP manages approximately $500 million in committed capital and is led by investment professionals that have extensive experience investing in virtually all types of energy technology. The investment team strives to partner with strong, experienced management teams and work with them to create significant value.”
So what’s it worth?
That’s the tough question, there’s no perfect comp out there. They compete with Invensys, which has water exposure, which means it’s trading at a higher valuation. It competes with Mantech and has a business similar to SAIC, but without the defense exposure of those companies. I see no reason why this company wouldn’t fetch 10x EV/EBITDA in a buyout (I'm not expecting one immediately), which with about $4m in EBITDA expected in 2012, adding back about $25m in cash (including restricted cash) gets one to about $3.40-$3.50. The important thing is with $1+ per share in cash, an active share repurchase program, and a 6x EV/EBITDA multiple, I don’t see a whole lot of downside.
Continued expansion away from nuclear so the nuclear cloud over the company dissipates
Potential sale, which is ultimately the goal of most PE investments