2007  No. 327


Should You Invest in a Stack Testing CEMS Company or Monitoring Instruments Company

GE, UTC and Teledyne think so. They have all purchased companies in the stack testing and monitoring business. Permapure, a Halma company, recently bought Baldwin. Perma Pure LLC, is a leading manufacturer of gas conditioning products including dryers, humidifiers, filters, coalescers, specialty scrubbers and complete sampling systems. They market these products worldwide for use in medical, industrial and scientific applications. Baldwin uses some Perma Pure products in its portable gas conditioning systems.

Halma has three specialist business sectors. They are: (1) infrastructure sensors detecting hazards and protecting people and property in buildings; (2) health and analysis improving public and personal health; and protecting the environment; (3) industrial safety protecting people and property at work.

The broader question was addressed on December 7 in a recorded video/audio Hot Topic. One aspect is whether the path to growth and profitability passes through or around China. Since China is the largest purchaser of air pollution control equipment, it is logical that the path leads through it. Since Chinese suppliers are rapidly developing world class skills and technology, it also follows that a sound strategy must address the potential competition from this region.

Revenues of air pollution control companies are soaring. The industry profits have increased at an unprecedented rate. However, finding an investment to capitalize on this boom is not going to be easy.

There are a number of barriers for individual investors. First, much of the profit will be generated by large companies such as Alstom, GE, McDermott and Siemens. Air pollution control is such a small percentage of the total profits for these companies that there will be little impact on stock prices from the air pollution control activities.

Another barrier is the industrial focus of some of the public companies where air pollution control is a significant segment. Companies such as Donaldson, Clarcor, CECO and Met Pro will not benefit from the huge surge in power plant air pollution control activity.

The small size of many of the companies is another barrier. Suppliers of components are typically private companies with sales of less than $40 million per year. One exception is Koch which supplies mist eliminators and ammonia. It is a very large private company. Air pollution control is therefore a small segment.

There are some opportunities for individual investors. Marsulex just received a $60-million scrubber order. It is a major participant in the Chinese market. In addition to conventional scrubber systems it offers a system to convert the sulfur to ammonium sulfate fertilizer.

Another possibility is MFRI. The company is the second largest producer of dust collector bags in the U.S. (GE BHA is the largest producer.) Many new and existing power plants will use baghouses rather than electrostatic precipitators.

ADA-ES has received more than $20 million in investment through private and then public offerings. It is pursuing the market for mercury control. It has an aggressive growth plan that would greatly increase its present annual revenues of only $14 million/yr. If more stringent mercury rules are adopted and activated carbon becomes the most popular choice for mercury capture, then the company could be a leader. On the other hand if the present Clean Air Mercury Rule is not struck down or if another option such as chemical oxidation prior to scrubbing becomes the popular choice, then the anticipated revenue growth will be difficult to achieve. ADA-ES or another company could also begin to rollup other small companies to create a significant presence in the industry. Allied and Babcock Power are privately held companies which could also serve as the base for multiple acquisitions.

In addition to companies making the basic air pollution control equipment it would also be possible to acquire companies making dampers, nozzles, pumps, burners and electrical controls used in air pollution control.

Siemens may pre-empt other would-be conglomerates. The purchase of Wheelabrator provided them with the system capabilities. The acquisition of U.S. Filter provides them with the scrubber wastewater treatment technology. Within the last few months they have acquired Advanced Burner Technologies (a manufacturer of low NOx burners) and Kuehnle, Kopp, and Kausch, a major supplier of air pollution control fans.

GE is also pursuing the market with the purchase of BHA, Enertec, EER, Betz, Ionics, Osmonics and Zenon.

Two ways to capitalize on the Chinese market are either to buy Chinese companies or build subsidiary companies in the region. Ahlstrom is an example of the latter. Its Lantor group has built a dust collector fabric plant in China. This allows them to pursue both the internal market and to export to other countries. Euro Tech Holdings Company Limited has acquired a 20 percent equity interest in Zhejiang Jia Huan Electronic Co. Ltd., a company making electrical controls for electrostatic precipitators. CCMP (an investment company with U.S. origins) has acquired controlling interest in Wuhan Kaidi, a large supplier of FGD systems in China.

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