From our colleague Barry Pasikov’s Hazelton Capital Partners 2015 letter to investors
CUI Global (CUI) Current Holding
CUI Global is a manufacturing and service company with two very distinct revenue segments. The majority of its revenues and earnings is currently derived from designing and selling power supplies, transformers, converters and connector for original equipment manufactures (OEMs); a slow growing but steady business with predictable margins. To augment the power supply business, CUI made two acquisitions focused on the natural gas industry: Exclusive license and eventual ownership of GasPT2 technology in 2009 and in 2013, Orbital Gas Systems, and its VE Probe. GasPT2 is a technology that is able to measure the physical properties of gas sample and infer its composition in nearly real time. When combined with Orbital’s VE Probe, which can safely and quickly draw natural gas out of pipelines, the two create a gas chromatograph (GC), an instrument used to measure the methane content (energy content) of natural gas. Up until recently, a GC was used primarily in a lab setting, but with the increase in natural gas production from traditional and shale deposits, natural gas has become the main energy source for many countries, especially in Europe.
Snam Rete operates Italy and Europe’s largest natural gas transmission and distribution pipeline with over 20,000 miles of pipeline. The company receives natural gas mostly from Russia, Iran, Qatar and Iraq, distributing within Italy, as well as transporting the gas into other countries like France, Germany and the Netherlands. The methane content of natural gas from Russia is significantly lower than the gas coming in from Iran or Iraq. Because all the gas received by Snam Rete is mixed together, they currently have no way of determining the methane levels they are delivering, and as such, are required by their regulator to only charge at the lowest level received. To solve this problem, Snam Rete has decided to install GCs throughout its pipeline to accurately measure and bill its customers for their energy consumption. After 3 years of delays, CUI and a competitor received a RFQ (request for quote) from Snam Rete in September, 2015 for the all-in cost (the unit, installation and yearly maintenance costs) for delivery of over 3,300 units which turned out to be ten times the original plan.
On February 10, 2016, CUI Global announced they had received the entire first purchase order for 400 units through the beginning of October 2016. The company believes that they have a very good chance to receive the entire purchase order for all 3300 units over the next three years. Winning this project would be a huge boost not only to CUI’s revenue and profits, but to its reputation within the gas industry. Historically, utilities are slow to adopt new technology. But once they do, the entire industry tends to move as a collective over time. Snam Rete is seen as the “first adopter” within the European gas industry and carries the “good housekeeping” seal of approval, which should open the door to future sales to other countries.
Hazelton Capital Partners has owned CUI global for nearly two years. Our initial investment was a much smaller holding, and the position was reduced even further after the share price nearly doubled in less than 6 months, as the market anticipated a pending deal with Snam Rete. Today, CUI is a much stronger company and well positioned to win a large portion, if not the entire order. Additionally, CUI has made some significant inroads into other product segments including its IRIS system which allows pipeline companies to remotely monitor and operate sections of their pipeline via computer and its mercury detection unit that is based around its VE Probe. If one were to value CUI Global solely on its power supply business and pipeline service revenue, adjusting for expenses associated with its natural gas products, its earnings power would value the company around $6.00/share. Even with a modest revenue outcome from the Snam Rete’s RFQ win, CUI’s value could increase meaningfully.
CUI Global is the type of company that Hazelton Capital Partners likes to invest in. It operates is a niche segment of large industry, flying below most investors’ radar. We feel the downside is identifiable and limited while the upside could be very significant with a number of positive events beyond the Snam Rete deal.