Finance & Investment ClubIndustrials Sector. Fall 2012

Senior Analyst: Esther Tay

Junior Analysts: Alexander Gedeon, Andres Claparols, Ava Koh, Brian Maeng, Chen Shi, Eri Ito, Eric Tom, Frances Wong, Junda Pan, Robin Wan

Energy efficient equipment

 

2

Industry Definition: Energy Efficient Equipment

Firms in this industry design, manufacture and sell energy-saving equipment and equipment components to reduce emissions and minimize energy consumption in petrochemical, power, construction and aerospace industries worldwide.

NF Energy Saving Corp. (NASDAQ: NFEC)

Woodward Inc. (NASDAQ: WWD)

Capstone Turbine Inc. (NASDAQ: CPST)

Ameresco Inc. (NYSE: AMRC)

ESCO Technologies Inc. (NYSE: ESE)

Dresser-Rand Group Inc. (NYSE: DRC)

 

3

Industrials Sector Breakdown

Energy efficient equipment

8.08B (0.015%)

Industrial Goods53,888.9B

(100%)Industrial Electrical

Equipment119.7B (0.22%)

AMRC13.08%

CPST1.96%

DRC41.51%

ESE12.46%

NFEC

0.27%

WWD30.73%

Revenue in 2011

 

4

Revenue Breakdown by Geography

AMRC CPST

WWD

US AsiaEuropeRussiaCanada Others

NFECESE

DRC

 

5

Revenue Breakdown by Sales

Microturbine parts82%

Services18%

CPST

Product Rev.Service Rev.

Intelligent flow control

equipment73%

Services27%

NFEC

Motors, CHP sys-tems and lighting

62%

Renewable energy prod-

ucts 24%

Services 14%

AMRC

Aerospace products 9%

WWD

Energy storage systems, air valves, steam turbine sys-tems91%

ESE

Utility solutions 50%

Filtra-tion products 27%

Services 23%

DRC

Services29% Hot gas turbo-

expanders, CHP systems71%

 

6

Industry Business Model

1) Evaluation and Analysis•Preliminary audit of client’s facilities and operation & maintenance costs•Establish mutually agreed performance standards

2) Design and Manufacture • Research, develop and produce energy efficient solutions based on

tailored requirements or commercially available products

4) Maintenance and Repair• Maintain and repair client’s systems under O&M contracts • Ensure products attain performance standards

3) Sales and Installation• Install and monitor energy efficient parts and equipment• Some standard modules are commercially sold through distributors

 

7

Industry SummaryEnergy Efficient Equipment Industry

RATING: BUY

Increasing government mandates to encourage energy efficiency

Energy efficiency growth in the US manufacturing sector

Correlation with declining oil demand in the US

Declining costs of implementing energy efficient equipment

Key Industry Drivers

Downside Risks• Heavy reliance on government• Global GDP growth slowdown • Fluctuation in prices used to make EE equipment

 

8

0.00

0.50

1.00

1.50

2.00

2.50

f(x) = 0.1136115 x + 0.981875363636363R² = 0.758080159935246

DOE's Office of Energy Efficiency and Re-newable Energy Budget ($ B)

Series1 Linear (Series1) Linear (Series1)

EERE

Bud

get (

$ Bi

llions

)1. Increasing government mandates to encourage energy efficiency

International Energy Agency implemented 25 energy efficiency recommendations in 17 countries between 2009 – 2011

Federal government offers both financial and non-financial incentives, technical assistance, and R&D

According to AMRC’s 2011 AR, 19% of the industry’s revenues come from contracts with the US Federal government

Industry revenues can be expected to grow $137 million (21.55%) by 2015 due to these contracts alone

2011 2012e 2013e 2014e 2015e0

200400600800

1000

Revenue from US Federal government contracts ($ M)

Year

Rev

enue

($ m

illio

ns)

 

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2. Correlation with declining oil demand in the US

2006 2007 2008 2009 2010 2011 2012e 2013e18

18.5

19

19.5

20

20.5

01000200030004000500060007000

Correlation between companies' revenue growth and declin-ing oil demand in the US

Demand for oil (million barrels per day) Companies' revenues

Year

Dem

and

for o

il (m

illio

n ba

rrel

s pe

r day

)

Com

pani

es' r

even

ues

($ m

illio

ns)

Companies' revenues = 34867.2317 - 1542.3431 *Demand for oil (million barrels per day)Correlation coefficient = 0.85 (strong correlation)

• Energy efficiency improvements in the residential sector between 2008 – 2012 are estimated to contribute about 1% of total U.S. reduced petroleum consumption

• Improving vehicle efficiency is often cited as a major reason for declining U.S. oil consumption since 2005

 

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3. Energy Efficiency Growth in the US Manufacturing Sector

16% reduction in energy intensity between 2002 – 2010

In the US, 65% of this decrease is due to EE

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0

0.5

1

1.5

2

Index of consumption for all purposesFRB IndexBEA Index

Year

index (1991=1)

Source: U.S. Energy Information Administration.

Canada Germany Japan UK US IEA 17

-2.5

-2

-1.5

-1

-0.5

0

Decomposition of energy intensity for selected IEA countries (1990 to 2006)

Energy Efficiency Structural change Change in energy intensity

Ave

rage

ann

ual p

erce

nt

Cha

nge

(%)

65%

After 1998: Decoupling of energy consumed by the manufacturing sector with the two manufacturing output indices >> Reduction in energy intensity

• Energy efficiency• Structural changes

Energy consumed by US manufacturing sectorFederal Reserve Board (FRB) IndexBureau of Economic Analysis (BEA) Index

1991 1994 1998 2002 2006 2010

1991 – 98: Energy consumed by the manufacturing sector followed manufacturing output levels

 

11

0

0.5

1

1.5

2

Energy consumed by the manufacturing sectorFRB index

Year

index (1991=1)

Approximately 23.6% reduction in energy intensity between 2010 – 2018

Assuming 65% of this reduction continues to come from energy efficiency, the energy efficiency industry will grow by 5% over the next 8 years

3. Energy Efficiency Growth in the US Manufacturing Sector Energy consumed by US manufacturing sectorFederal Reserve Board (FRB) Index

1991 1994 1998 2002 2006 2010 2014e 2018e

Source: U.S. Energy Information Administration.

Year Energy intensity

2010 0.618

2014e 0.540

2018e 0.472

 

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1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

2013

2017

020406080

100120140160180200

Industry energy savings due to energy efficiency

Hypothetical energy use without EE improvements Actual energy use Year

Ener

gy (E

J)

Firms spend an average of 20% of their total operating costs on energy Due to energy efficiency improvements, firms experienced 68% in energy savings in 2011 compared

to what they would have otherwise incurred Existing federal energy efficiency standards have reduced U.S. energy use by 3.6% per year Energy savings can potentially reach 79.6% in 2017, making EE equipment an attractive investment

2013

e20

15e

2017

e

68%

4. Declining costs of implementing energy efficient equipment

Source: IEA Indicators database and Alliance to Save Energy (ASE)

79.6%

 

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Risks Industry is heavily reliant on government policy and funding

Demand for EE equipment is mainly derived from environmental regulations set by the government

Federal spending cuts in the beginning of 2013 (Fiscal cliff) may decrease funding towards the industry

Global GDP growth slowdown may decrease industrial energy demand Unfavorable economic conditions would reduce clients’ demand for EE equipment to

expand production Global GDP growth slowdown may decrease oil prices and reduce the need for EE

Fluctuation in prices of raw materials used to make energy efficient equipment Fluctuation in the availability and cost of raw materials will increase the cost of making EE

equipment and reduce margins for EE equipment companies

 

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Industry Comparable Multiples Ticker Market

cap ($M)% of 52 week high

Closing price

EV/ EBITDA

LTM EBITDA Margin

Debt/ Equity

Forward P/E

5-year Revenue CAGR

LTM ROE(%)

AMRC 417.90 61.37 9.04 11.19 8.17 1.73 13.64 13.98 8.86

CPST 286.10 64.05 0.98 -10.01 -22.99 0.72 N/A 31.26 N/A

DRC 4,000 93.44 52.81 11.72 16.03 2.49 14.51 6.79 18.37

ESE 977.27 90.28 35.66 13.44 11.39 0.68 12.46 3.78 7.33

NFEC 6.76 19.29 0.65 4.25 21.96 0.48 N/A 7.62 4.44

WWD 2,440.00 69.72 32.07 8.84 15.79 0.94 14.19 10.43 14.60

MIN 6.76 19.29 0.65 -10.01 -22.99 0.48 12.46 3.78 4.44

MEDIAN 697.59 66.89 20.56 10.02 13.59 0.83 13.92 9.03 8.86

MEAN 1354.67 66.36 21.87 6.57 8.39 1.17 13.70 12.31 10.72

MAX 4000 93.44 52.81 13.44 21.96 2.49 14.51 31.26 18.37

 

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Final Recommendation

Despite the industry’s heavy reliance on regulations, government support towards the environment is unlikely to decline

While a slowdown in global GDP growth might negatively impact the industry, it will also force companies to move towards more cost efficient methods of energy consumption through EE equipment in the long run

Sale of specialized equipment and services makes the industry less cyclical

Energy Efficient Equipment Industry

Recommendation BUY

2006 2007 2008 2009 2010 2011

-6

-4

-2

0

2

4

6

-6000

-4000

-2000

0

2000

4000

6000

Weak correlation between global GDP change and industry revenues

Companies' RevenuesWorld Liquid Fuels Consumption ChangeWorld GDP Change

Perc

enta

ge c

hang

e (%

yea

r on

year

)

Com

pani

es' r

even

ues

($ m

illio

ns)

Correlation coefficient = 0.49 (weak)

Companies' revenues = 4980.0041 – 182.4123* World GDP change

THANK YOU !

 

17

Porter’s Five Forces

Rivalry among existing

companies

Threat of new

entrants

Bargaining Power of Buyers

Threat of substitution

Bargaining power of suppliers

HIGHRaw materials include steel, electronic components, power systems and welding rods. Fluctuation in availability and cost of raw materials may have an adverse effect on operations and results of operations.

LOWFirms in the industry produce specialized products and services catered to their clients. Government contracts also provide a stable source of revenue.

LOW• Increasing oil prices and the relatively high cost for industries

to implement renewable energy on a large scale will push companies towards EE equipment to meet environmental regulations and cut costs

• Company products are highly specialized to client needs

MEDIUMIndustry is at a nascent growth stage and has the potential for more players, however economies of scale is required in order to design and produce a variety of EE equipment to serve client needs.

 

18

 

19

Mandates to Increase Renewable Energy Sources

Source: EIA

Renewable Portfolio Standards in the US, 2011On average, the fraction of electricity generated from renewable energy sources will increase 16.2% by 2015 and 20.7% by 2020.

 

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-6

-4

-2

0

2

4

6

8

-100

-50

0

50

100

150

World liquid fuels consumption, World GDP and WTI real crude oil prices

World Liquid Fuels Consumption Change World GDP ChangeWTI Real Crude Oil Price (GDP Deflated)

YearPerc

enta

ge c

hang

e (%

yea

r on

year

)

Pric

e pe

r bar

rel

(real

201

0 do

llars

)

Correlation between WTI crude oil prices and industry revenue is 0.37 = weak correlation

Companies' revenues = 1472.1316 + 13.8408 * Real crude oil prices