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Orders flowing as gas industry finally recognizes potential of CUI Global's technology

Last updated: 09:23 31 May 2016 EDT, First published: 04:23 31 May 2016 EDT

A gas hob
Light at the end of the tunnel: It was tough to gain widespread adoption for the tec

Nobody ever got fired for buying IBM (NYSE:IBM). That used to be the old adage in business before the advent of the tablet and the smartphone.

The same reasoning was behind the gas industry's slowness in adopting a probe and analyser that measures the quality of gas almost instantaneously, which was created to replace an old, slow and haphazard system that was 60 years old.

“I thought it [our technology] would be adopted very quickly,” said William Clough, chief executive of CUI Global Inc (NASDAQ:CUI), which acquired the technology five years ago.

“I was very naïve.”

No matter that the cost savings (including installation) were significant and that device was “plug and play”, requiring no maintenance.

The gas industry, it seems, is incredibly conservative. It took a long, long time to persuade the movers and shakers to start dumping the expensive, slow and unreliable gas chromatograph system.

Clough describes the process of adoption as being a little like getting a school of fish to change direction.

That shift was aided by ‘fish herds’ National Grid here in the UK and Italy’s transmission company, SNAM RETE Gas, which were the early adopters that helped change industry opinion.

SNAM took the analyser and probe system, developed here in the UK by a company called Orbital Gas Systems, and put it through rigorous assessment.

“It started out with the Italians four and half years ago and ended up with a year of lab testing, six months of field testing,” said Clough.

“They then bought six units and tested them for two years. We had another six months of those units being tested by the University of Milan.”

SNAM RETE eventually ordered 3,300 units and CUI could ultimately end up shipping 7,000 bits of kit.  

Today, the company is at an inflection point. The French are “very interested”, Clough said; the Portuguese have bought their first units and the company is “already with Repsol in Spain”.

“We are in negotiations with the Germans,” he added. “So, Western Europe is going to be the big next step for us.”

The sales team has also been out to meet TransCanada, which may need as many as 2,000 units in the next six to eight months.

Its gas analyser and probe system requires certification in Canada.

But the firm has done much of the regulatory legwork in its submissions to the EU.

“Instead of years for adoption it will be months for adoption,” said Clough.

The company’s gas monitoring system is also very good at sampling for trace damaging elements in gas, such as moisture, mercury and hydrogen sulphide.

Units are being deployed in the US and Australia in this role.

NASDAQ-listed CUI also has a “small and very stable” electronics business that turns over US$50-60mln a year and generates an operating margin of around 11%.

With the aid of National Grid, it has developed a system called IRIS that makes maintenance of gas infrastructure a lot more effective.

It delivers huge time and cost savings by combining diagnostics with the ability to shut off valves and re-route gas.

The upshot is the number of emergency call-outs falls. And, when the technician is on-site, he or she has the right kit and tools to fix the problem.

Financially, things are starting to take off. In the three months to March 31 revenues were up 24% at U$20.7mln as it booked a modest loss.

This was slightly below market forecasts and prompted some modest changes in forecasts.

Even so, Lake Street Capital Markets, one of six firms following the company, expects CUI to post revenues of US$105mln this year, rising to US$128.5mln next year and then US$162.3mln.

Underlying earnings (EBITDA) are expected to be respectively US$5.6mln, US$14.7mln and US$22.9mln by the end of 2018.

That’s not bad for a business that almost went under in 2008, weighed down by around US$40mln of debt.

In that time Clough and his team have paid off every cent owed as well as creating a new, innovative and growing business.

However, the share price, which got above US$9 in March, has failed to reflect the progress and the potential of the business.

Today, the stock is changing hands for just under US$6.

Traders tell me that this is the result of one possibly forced seller who has just cleared his position.

Analysts, meanwhile, reckon CUI is worth between US$9 and US$12 a share.

“I’m buying stock right now,” said Clough. “It is an incredible time to buy the stock.”

You suspect he may have bagged a bargain.

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