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Cinpart’s voltage optimisation acquisition is paying off

In June last year, we highlighted Alternative Investment Market-quoted Cinpart as a high-risk, high-reward play on the burgeoning voltage optimisation sector.

In early 2009 the company, which had previously been focused on producing electrical components for gas appliances, had chosen to make a move into the voltage optimisation market by setting up a new subsidiary called Active Energy. That move seems to have paid off, with Cinpart appearing to have gained some advantage by making an early move into the sector.

Soon after our first profile of Cinpart was published, the company announced that Active Energy – in which Cinpart now holds a 72.2% stake – had won a £1.2m contract with an unnamed home products retailer to supply and install a number of its voltage optimisation units. Then, in September, Active Energy secured its first tender with a local authority purchasing organisation.

This progress has been reflected in the company’s share price performance with Cinpart’s shares more than doubling since last summer, from 7.75p each in June 2009 to above 16p each today.

Voltage optimisation is a method of reducing electricity consumption by lowering the single-phase voltage that enters a building to 220 volts. It is a particularly effective means of saving energy in the UK because there is a national problem of ‘over-voltage’.

While the supply voltage is permitted to be within a range of 207V and 253V within Europe, in practice the UK grid’s voltage is supplied at 242V compared to the average European voltage of 220V. Given that almost all electrical equipment manufactured in Europe and the UK today is rated at 220V, there is an opportunity for electricity users within the UK to make energy savings of more than 10% just by transforming the voltage that goes into buildings.

Active Energy’s VoltageMaster range of transformers are aimed at helping non-domestic customers save energy. The equipment is designed to be installed in factories, hotels, schools, offices and hospitals save energy. And Active Energy’s Chairman, Christopher Foster , estimates that there are up to 450,000 large buildings in the UK that can use VoltageMaster.

As well as the obvious benefit of energy savings, voltage optimisation has a number of other advantages. Firstly, it is non-controversial since it is simply a piece of equipment that is installed, out of sight, in a switch room. Secondly, it is largely maintenance free and is designed to work for at least 15 years. And, as well as producing instant results as soon as it is installed, customers can expect to recoup the cost of their capital outlay within 12 to 36 months.

Active Energy’s June deal with a major multinational home products retailer would see the business installing its VoltageMaster units throughout the UK. At the time, Cinpart’s chief executive officer, Kevin Baker, said that the deal highlighted “tremendous prospects for our subsidiary”.

September’s tender agreement was with the Eastern Shires Purchasing Organisation (ESPO). ESPO is a local authority purchasing consortium that operates throughout the Midlands and the East of England. The period of the contract is from September 2009 to the end of August 2011 and, although no ESPO member has a contractual commitment to purchase Active Energy’s products, ESPO has advised the company that the estimated value of the contract is £15m.

Cinpart’s management also reports that Active Energy has sales leads with other local authorities, as well as with central government and blue chip firms, for the VoltageMaster unit.

Interim results covering the six months to 30 June 2009 showed that first half revenues fell 26.4% to £802,604, while Cinpart made a loss for the period of £704,992 (H1 2008: £194,416).

The poor financial performance was due to the ongoing decline in sales of white goods, which has had a knock-on effect on Cinpart’s legacy electrical components businesses. Before the establishment of Active Energy, Cinpart’s main activity was the manufacture and sale of gas ignition components for appliances such as ovens, boilers, heaters and laundry driers, and it is an established supplier to major white goods manufacturers, including Electrolux and Glen Dimplex.

As well as its switch into the voltage optimisation market, Cinpart has been taking action to lessen the impact of the economic slowdown on its legacy businesses: Gasignition and Derlite. These actions led to a number of non-recurring costs during the period, including a £57,784 charge relating to redundancy payments to employees in Thailand.

In September, Cinpart’s management said that despite recent declining sales the outlook for its legacy businesses was stable, with increased levels of orders being received and a number of new products being recently introduced for the legacy businesses’ current customers.

At the end of June, Cinpart’s cash holdings were £160,169 – which was significantly more than the £22,059 on its balance sheet at the end of December 2008, although the company had conducted a placing at two pence per share to raise £729,000 in March 2009.

Since the half-year stage the company has completed two further placings, at 10 pence per share and 12.5 pence per share, raising a total of £1,825,000. These placings were made not only to fund the expansion of Active Energy in the UK but also to fund the establishment of subsidiaries in a number of international markets – including Australia, Thailand and Southern Europe – that will sell and install VoltageMaster products that will be produced by the company’s Thailand-based manufacturing facility.

Analysts who follow Cinpart appear keen on the company’s shares. Investment bank Ambrian Partners rates the shares as a ‘speculative buy’. Meanwhile, Edison Investment Research believes the shares have a fair value of 30 pence each – which represents an upside of around 80% to the current share price. This valuation is based on near-term forecasts that estimate Cinpart will achieve revenues of £2.9m for 2009, increasing sharply to £12.4m for this year. As far as profits are concerned, Edison expects the company to make a pre-tax loss of £697,000 for 2009 before producing a pre-tax profit of £1.8m for 2010.

Disclosure: The author holds no positions in the company