Risk taking is a necessary fact of business life, particularly for entrepreneurs and small companies. Sticking to what you know can be a successful formula for the continuing success of large companies, which can rely on economies of scale to bully smaller competitors out of their markets and squeeze extra margin from both suppliers and customers, but for a small business to get big it needs to take a chance.
For small firms looking to significantly increase revenues and profits over a short time frame the risk taken often means a shift from a dependable, but unexciting market, to a burgeoning sector where first-mover advantage can deliver huge rewards. One firm that recently recognised that it needed to make such a shift is AIM-quoted Cinpart.
Cinpart, whose main businesses have traditionally made components for manufacturers of gas appliances, established a new subsidiary business called Active Energy earlier this year. Active Energy – in which Cinpart holds a 65% stake – is focused on ‘voltage optimisation’, which could become a significant market in the UK as the country attempts to meet its obligations under the Climate Change Act that came in last November.
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 is aimed at helping non-domestic customers save energy. The equipment is designed to be installed in factories, hotels, schools, offices and hospitals, and Active Energy’s managing director, Tony Freudmann, estimates that there are between 300,000 to 400,000 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.
If Active Energy managed to sell VoltageMaster (which is priced at tens of thousands of pounds per unit) into as many as 400,000 buildings it would certainly have a profound effect upon Cinpart’s turnover, which was just £2m last year. But even if its subsidiary sold VoltageMaster into a just a small percentage of this target market, Cinpart would benefit a great deal from this new revenue stream.
The product is proven. SDC Industries, which owned the rights and intellectual property of VoltageMaster before they were transferred to Active Energy, has already installed the technology into prisons, manufacturing plants, council buildings, retails outlets, educational institutions, leisure facilities and hotels. (SDC’s managing director, Stephen Coomes, owns 25% of Active Energy as part of the deal with Cinpart).
Before the establishment of Active Energy, Cinpart’s business had been suffering because of the global economic downturn.
The group’s main activity is 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. But the dramatic slowdown in the housing market has had an adverse impact on the sale of white goods, which had a knock-on effect on Cinpart’s own revenues. Consequently, Cinpart’s turnover decreased 28% last year and the group fell into the red with a loss before tax of £334,937 (2007: £140,245 profit).
But Cinpart’s management has taken steps to mitigate the effects of the downturn on its core business. The group cut costs by slashing its workforce by a third and renegotiating the salaries and wages of the remaining staff.
Actions taken by management to put the group on a more solid footing last year meant Cinpart incurred an unusually high amount of non-recurring central costs, which contributed to 2008’s losses. The management team says the group’s core businesses are now well positioned to rebuild healthy sales when market conditions improve.
However, it is the new Active Energy business that Cinpart’s management believes will make a “substantial contribution” to the group’s turnover.
Initially, Active Energy intends to develop sales of the VoltageMaster transformers in the UK. The group has already identified, and is in talks with, a number of local government authorities and blue-chip companies about the product.
Longer term, export sales of VoltageMaster are also a possibility. The technology could work in other parts of Europe, where although the standard voltage supply is 220V there are some countries where fluctuations in supply lead to levels as high as 238V.
After hitting a low of 0.85p towards the end of last year, Cinpart’s share price spent the beginning of this year mostly trading between two pence and three pence. After the news in early March of the establishment of Active Energy, along with a connected placing of 36.5 million shares at two pence each, the shares began a steady climb to today’s level of more than seven pence each.
The summer is traditionally a quiet time for shares, but investors should not rule out the possibility of Cinpart releasing news during the next few months of Active Energy’s first sales of VoltageMaster. This is a share to keep a close eye on.