By: Steven M. Roge, CMFC
GSE Systems Inc. (GVP), as of March 21:
Share Price: $2.12
Intrinsic Value: $3.58
Buy Below: $2.51
Business Description and Background:
GSE Systems, Inc. provides simulation and educational solutions and services to nuclear and fossil electric utilities, and chemical and petrochemical industries, in the United States, Europe, and Asia. It also provides plant monitoring, signal analysis monitoring, and optimization software, primarily to the power industry.
The company’s power simulation products include Java Applications & Development Environment that allows customers to access simulator and run simulation scenarios from anywhere they have access to the Web; eXtreme Tools, a suite of software modeling tools developed under the Microsoft Windows environment; RELAP5 R/T HD, which enables the engineers to understand and control various internal functions of RELAP5, a safety analysis code; SimExec and OpenSim, which are real-time simulation executive systems that control real-time simulation activities and allow an off-line software development environment; and SmartTutor, a software for instructor stations.
Its power simulation products also comprise eXtreme I/S, which allows the use of Microsoft Word and PowerPoint to control the simulation environment; Pegasus Surveillance and Diagnosis System, a software package for semi-automatic plant surveillance and diagnostics; SIMON, a computer workstation system to monitor the stability of boiling water reactor plants; and VPanel, an interactive visual training solution.
In addition, the company provides consulting and engineering services, including application engineering, project management, training, site services, maintenance contracts, and repair.
GSE Systems, Inc. has strategic alliances with All Russian Research Institute for Nuclear Power Plant Operation; Kurchatov Institute; Risk Engineering Ltd.; Samsung Electronics (SSNLF.PK); Toyo Engineering Corporation; and Westinghouse Electric Company LLC.
The company was founded in 1994 and is headquartered in Sykesville, Maryland.
Source: Yahoo Finance
Thesis: We believe investors are overreacting to the impact that events at the Fukushima reactor will have on GVP’s long-term future. While there will be a short-term hit to revenue and profitability, the push for new safety measures and plant upgrades will require the use of GVP’s simulation service.
With a market capitalization of roughly $40mm, cash of 27mm, no debt, revenues of $47mm, backlog of $56mm ($9mm from Japan), and a dominant 60% world-wide market share in the nuclear simulation industry, GVP looks to be one of the most inexpensive companies in the marketplace.
Prior to the events on March 11 in Japan, GVP was well underway in diversifying its business strategy into non-nuclear simulation capabilities, including oil, gas, and fossil. It has made two acquisitions over the past year to do this.
TAS Engineering was purchased in April of 2010 for $2.3mm. TAS provides electrical engineering consulting to non-nuclear businesses such as BP, Conoco Philips (COP), and ABB. This acquisition extends GSE’s modeling and simulation capabilities into electrical distribution and grid systems (smart grid technology). It also provides opportunities for cross-selling training to TAS clients and gives GSE a presence in the U.K., which has eight new nuclear plants planned. Even prior to this acquisition, GVP has delivered 121 fossil power plant simulators and 96 process industry simulators.
EnVision Systems Inc. was purchased in January 2011. It primarily serves the oil & gas refining industries. The oil & gas simulation systems are generally lower fidelity than nuclear. However, the acquisition gives GSE a high-margin library of generic refining models. This acquisition helps expand its simulation-based training programs. EnVision provides interactive multi-media tutorials and simulation models.
According to the U.S. Energy Information Administration, world energy consumption will increase by 49% from 2007 to 2034. New consumption means new plants, workers, and training. GVP has been at the forefront of developing training solutions leveraging the use of its training systems.
The incumbent workforce is aging and facing dramatic turnover. The average nuclear plant worker is 50 years old, and 42% of the current workforce is expected to be replaced over the next five years. Many workers have delayed retirement over the past two years due to the economy. Training is one service that utilities tend to wait to purchase until the absolute last minute. Case studies demonstrate that the inclusion of gaming technology such as immersive 3D environments can reduce the time and improve the learning dramatically. GVP is well positioned to take advantage of future training.
Nuclear still remains the driving factor for GVP’s business. Prior to March 11, there were 252 new nuclear plants scheduled to be built in the next 20 years. There are currently 60 plants under construction in 14 countries. China is expected to build the most nuclear power plants in the next 20 years. China has 13 nuclear reactors in commercial operation and 27 are under construction. In Russia, eight large reactors are under construction, and seven further reactors are planned to replace existing plants. Each new plant will be required to have a full scope simulator ready for operator trainings and certification two years prior to plant operation.
The overriding theme since Chernobyl, and reinforced earlier this month, is the safety of nuclear technology. The one glimmer of promise from this whole tragedy is that other nuclear power plants will likely be built with many passive safety restraints. The Fukushima plant is 40 years old and only had a passive system (battery back-up after diesel powered generators failed) that cooled the reactor for one hour. New systems, such as Westinghouse’s AP1000, have a passive safety system that will last for 72 hours. GVP became Westinghouse’s preferred vendor for the development of simulators for their AP1000 reactor design.
Another trend that has been mentioned is a push to Small Modular Reactors for plants producing 45-200 megawatts (versus 400+ megawatts). These smaller plants will require new simulators and will likely lead to higher margins for GVP. However, it remains to be seen if this thought will transpire to a new trend.
The U.S. Nuclear Regulatory Commission (NRC) requires nuclear plant operators to earn their licenses through simulator testing. Each nuclear plant simulator must pass a certification program to ensure that the initial plant design and all subsequent changes made to the actual plant control room or plant operations are accurately reflected in the simulator. Plant operating licenses are tied to simulator certification.