December 7, 2006

Investment in Air Pollution Control Much More Attractive Now

Yesterday McIlvaine conducted a “Hot Topic Hour” discussion on Investment Opportunities in Air Pollution Control. Lutz Bergmann of Filter Media Consultants and Jason Makansi of Pearl Street were panelists. The participants included investors in private companies, investors in public companies, acquirers, and other interested parties.

The McIlvaine Air Pollution Management service provided the visual material. One table lists a number of public companies. An extract from that table, which follows, is representative of the various company types.

There are only a few companies that are both primarily involved in air pollution control (APC) and are public. ADA-ES is one. Fuel Tech, Hamon, Met Pro and MFRI generate 30 percent or more of their revenues from the APC market. Donaldson is one of the largest air pollution control companies. However, the APC business, even including the gas turbine filters, is less than 20 percent of the total.

Two companies are making public offerings this month. One is Hamon and the other is A-TEC (owner of Austrian Energy). Hamon has rebounded with revenues in the U.S APC sector more than doubling in 2005 to over $100 million.

MFRI has enjoyed a big increase in sales and earnings. For the nine months ended October 31, 2006, net sales were $164,656,000, up 41.6 percent from $116,277,000 for the comparable period in 2005; net sales for the Piping Systems business increased by 58.4 percent, the Filtration Products business increased by 30.1 percent, and the Industrial Process Cooling Equipment business increased by 23.5 percent. Sales increased in each business segment due to the better economic environment, a higher starting backlog and the implementation of a more global strategy. Net income for the first nine months of 2006 was $5,185,000 up 219.1 percent from the corresponding prior-year period.

Companies selling components are an attractive segment. Charter which owns Howden is generating significant revenues from the sale of fans for air pollution control systems. GLV sells the wastewater treatment systems to handle the scrubber discharges.

The air pollution industry is technology forcing. So investors need to look for the next big innovation. There are many candidates. One is a combination device that both filters the hot gas and reduces NO_x. The Madison Filter subsidiary of Clear Edge is offering such a device. Not only does it reduce the cost and size of the air pollution control system but it would allow redesign of the back end system (specifically the air preheater) to considerably improve boiler efficiency. This would also have the additional advantage of reducing greenhouse gases.

Jason pointed out that district heating plants enjoy thermal efficiencies of close to 70 percent or more than double what the typical stand alone coal-fired power plant achieves. So utilizing the waste heat from coal-fired plants by establishing energy farms would be very attractive.

The Blue Flint ethanol plant will cook the corn from waste heat supplied from the Coal Creek coal-fired plant. McIlvaine envisions ethanol plants located adjacent to many coal-fired plants.  Early investigations indicate that moving the grain to the coal plant is not that costly compared to the movement of dry distiller grain solids and ethanol from those plants. (A shorter trip for the end products offsets the longer trip for the raw material.)

There was a discussion of rollups of smaller companies. GE and Siemens have been engaged in this activity. There are many smaller companies which are candidates. McIlvaine has identified a dozen or more in the $15-$50 million revenue range. There are also a number of companies which fall below this level. Most large companies cannot afford to even evaluate very small companies since the cost of the evaluation is large compared to potential profits. Some of these smaller companies, however, can be acquired by the new subsidiaries. Siemens purchased Wheelabrator. Wheelabrator acquired the Croll Reynolds APC assets. So in this manner Siemens was able to add a small company to the fold.