Gse Systems, Inc. (NASDAQ:GVP)

Thursday, December 17, 2015

Research

Beginning To Track $GVP ($2.36)

We began tracking GVP a few weeks ago, but shares have increased nearly 20% during our due diligence.  If our financial modeling is accurate (shown below) we concluded that at current levels, an investment in GVP is only warranted if:

  • An aggressive forward P/E is applied. (We normally apply a forward P/E of 15 to 20)

  • More aggressive revenue projections are achievable.

  • Margins are significantly improved.

We plan to interview management to determine if any of these outcomes are likely.

Here is our initial reasons for optimism:

Insider buying, activist involvement, restructuring efforts by new management team along with strong topline growth has piqued our interest in GVP.  GSE Systems Inc is a global energy industry performance improvement company.  GVP is a is a world leader in real-time high-fidelity simulation, providing a wide range of simulation, training and engineering solutions to the power, energy and process industries.  GVP operates in two segments: Performance Improvement Solutions and Staff Augmentation. Based on the introduction in the company’s 10-K:

1. Performance Improvement Solutions

This segment includes various simulation, training and engineering products and services delivered across the breadth of industries we serve.  

2. Staff Augmentation

Staff Augmentation services provide specialized workforce solutions primarily to the nuclear industry.  These employees work at our clients' facilities under client direction.  

Reasons for tracking:

  • Insides are buying the company’s stock in the open market. Since November this year, insiders have purchased 180 thousand shares at an average price of $1.81.

  • There is an activist investor involved in this company. On December 30, 2014, activist investor Spear Point Capital Management filed a 13D together with Richard C. McKenzie, Jr., and as a “Participation Group”, they owned 1.02 million shares, representing 5.69% of the total outstanding shares of GVP. In May 2015, the Group increased their position to 1.24 million shares (6.93% of total outstanding shares). On their most recent November 24, 2015 13D/A filing, the two parties decided to terminate the Participation Group Agreement because”

“Due to recent changes in the management and composition of the Board of Directors of the Issuer, and due to restructuring efforts begun by the Issuer, Spear Point is supportive of the current direction of the Issuer.”

And Spear Point Capital owns 0.75 million shares (4.19%); Richard C. McKenzie, Jr. owns 0.22 million shares (1.22%), respectively.

  • On July 30. 2015, GVP announced that it appointed Mr. Kyle J. Loudermilk as its CEO and President. According to the introduction in the press release:

“Mr. Loudermilk joins GSE from MicroStrategy, Inc., a publicly-traded enterprise-analytics, mobile and security software company. He served as MicroStrategy’s Vice President, Technology / Development Operations since 2013, and was Vice President Corporate Development from 2005 to 2009. From 2009 to 2012, he was Vice President Product Management at Datatel, Inc., a leading provider of software and services for higher-education institutions and technical schools. Datatel was a portfolio company of Hellman & Friedman LLC prior to Datatel’s strategic combination with SunGard Higher Education, resulting in a successful transaction for investors. Mr. Loudermilk also held various senior management positions at Aspen Technology, Inc., a publicly traded, leading provider of enterprise-level software and services that enable energy and chemical companies to optimize their manufacturing operations performance. His positions at Aspen included Vice President Design and Simulation Business Unit, and Vice President Research and Development. Mr. Loudermilk began his career as a Process and Project Engineer for Mobil Oil Corporation. He earned BS and MS degrees in Chemical Engineering from Columbia University, and later attended Harvard University’s General Management program.”

  • Annualized net income based on Q3 2015 is $592 thousand and since the company is planning to have $5 million cash savings from its restructuring moving forward, then the projected annualized fully taxed EPS would equate to $0.20.

  • The company basically has no debt, along with $0.91 per share in cash.

  • There are certain steps regarding the restructuring plan announced in September this year. The first step is cost cutting and operating efficiency improving, and the second step is illustrated by the current CEO in the commentary of the company’s Q3 2015 financial results:

“Under the next phase of our strategic plan, we expect to take actions to reinvigorate the growth of GSE’s businesses, including enhancing our senior leadership team. We also expect to add new elements to our growth platform over time, including initiatives that support a more diversified, recurring revenue base. “

Caveats:

  • Backlog is flat but still strong.

  • Sequential growth has been limited over the last three quarters, and the company is facing tough comparables in the coming quarters.

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  • Company has a history of not being able to break out of a quarterly revenue range of between $13 or $14 million, often retracing to lower levels of quarterly revenues.

  • The company also services the energy sector. However, we need to perform more due diligence on the revenue contribution from the energy sector.