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Description:

Burckhardt Compression is an industrial group focusing on reciprocating compressors. The company runs two major business units: a) manufacturing (including installation), and b) customer and related services. In the manufacturing division, the company produces compressors for the petrochemical and industrial gas industry, refineries, as well as the gas transport and storage industry. 

The company is a beneficiary of dual secular growth trends currently reviving the gas industry. The principal drivers are: tightening emission standards and the petrochemical industry’s expiring capex cycle. For this reason gas is expected to replace a large part of oil usage in the future. This combination offers the company a unique long-term business opportunity.

Burckhardt benefits from it products having a very high reputation, and because they are mission critical items, it can sell them at a premium price. Furthermore, because its products are very reliable with an average expected service life of about 25 years, the long service life is key crucial to its customers, both customer satisfaction and loyalty are high.

On a worldwide basis, the company has about 7,000 compressors installed. Burckhardt’s business model doesn’t only include the manufacturing, but also after-sales service and maintenance. This part of the business is generating about 35% of annual revenues, and this number is expected to grow with the installation of new units and the switch from orphaned compressors.   

Given that the industry entry barriers are very high for new comers, Burckhardt appears to be well protected. It enjoys a strong industrial positioning in a niche market, which has generated excellent cash returns in the past. 

The present company results look good and the outlook for participation in the dual secular growth trends is compelling. At 8x the 2013 EV/EBITA, the valuation is better than its peer-group’s. The EBIT margin of around 19% is good for an industrial group like BCHN.  

Strengths and weaknesses analysis / Fundamental analysis: 
Strengths: 

• The company is a strong player in the dual secular growth trends which are reviving the gas industry,
• The company has an excellent track record for free cash-flow generation,
• The industrial gas market is in a cyclical recovery stage with structural growth being observed. The cycle is in its early stage,
• The company is considering strategic acquisitions to grow its business.

Weaknesses:

• The length of the economic cycle (this secular growth trend is going to be slow but longlasting) is  negative to an immediate value appreciation,
• The company’s activity is highly leveraged to the cyclical swings of the oil and gas processing industry, 
• The company’s activity is dependent on a limited number of suppliers for its key products,
• The loss of a single client could have a significant impact.