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Edmond Jackson's Stockwatch: Lamprell
By Edmond Jackson | Fri, 4th January 2013 - 00:00
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
When any share slides on profit warnings then enters "talks with lenders over banking covenants" the market typically takes a very cautious view until there is evidence the risks are abating - hence a 15% bounce in the shares, briefly over 110p.
The 19 November warning of: "a much greater loss for 2012 than previously announced or anticipated" now rather contrasts with Lamprell ending the year with net cash in the region of $100 million (£62 million; the international oil industry convention is to report in US dollars). Profit/loss and cash are not the same thing, but sentiment-wise the sense came across last year of a corporate black hole which this latest update nulls. Higher revenues and tighter financial controls have helped working capital to improve significantly in recent months.
Since the last update was only six weeks ago, shareholders selling around that time might feel aggrieved. This improving working capital trend was not mentioned - nor indeed was there any mention of cash along with the slew of losses - as this would be the crux issue for bankers.
|Year ended 31 December||2007||2008||2009||2010||2011||2012||2013|
|FRS3 pre-tax profit (£m)||35.6||58.6||17.6||41.7||40.8||-65.3||0.62|
|Normalised pre-tax profit (£m)||34.2||60.9||17.5||27.6||42.6|
|FRS3 earnings/share (pence)||16.2||26.6||7.98||18.9||17||-25||0.24|
|Normalised earnings/share (p)||15.5||27.6||7.93||12.5||17.8|
|Cash flow per share (p)||41||6.64||-6.61||67.1||-19|
|Capex per share (p)||3.18||16.9||5.05||7.14||12.1|
|Dividend per share (p)||4||8.77||1.98||4.54||8.32|
|Net tangible assets per share (p)||35.6||65.6||65.5||81.6||74.9|
|Source: Company REFS.|
However the end-August interims did cite $134 million cash and $35.7 million net debt, an improvement in the overall balance since end-2011. Bear in mind also that the cash is hardly for shareholders' entitlement; it is a necessary aspect of margin deposits for guarantees on major projects. There is no near-term prospect of any dividend.
So on consideration, this latest news of waivers from lenders over debt covenants was to be expected and Lamprell hasn't yet disclosed what it may have cost. The update does mention that revenues will reduce in the early part of 2013, but management is confident of support from core lenders towards adequate working capital, which will also be used to fund new projects.
Interestingly, "the company is moving forward with a wider financing of the business which will provide a longer-term financial platform to fund its growing activities... expected to be completed during the first half of 2013." The end-June 2012 balance sheet had $169.7 million short-term debt, down from $251.1 million at end-2011. While the company does not appear to demand further equity, for covenants effectively to have been tested/breached implies a possibility bankers will want to see an equity element in this refinancing. This would also be consistent with the company being prompt to issue good news as 2013 kicks off, supporting the share price.
Various projects are proceeding to plan and Lamprell has recently been awarded a further North Sea-related project worth about $40 million - although this is small in the context of the $1.4 billion order book cited last November. A more detailed trading update is due later in January and if this reinforces a recovery theme, the shares could climb further. Any price target is highly speculative, for it is very hard to project earnings and there is no dividend. But it is just such a scenario where speculators latch on to "the story" and take their main cue on whether it is improving.
Sentiment also has scope to improve - assuming consistently better news - because it is cautious after multiple profit warnings last year. Broker coverage appears to have trailed off, probably in humiliation: Company REFS for example recently cites only a 'hold' stance by Investec Securities on 13 December. There are more about if one looks, albeit with contrasting targets such as JP Morgan Cazenove reiterating its 35p a share target even after the 2 January update, while Liberum Capital has trimmed its from 176p to 153p. I would not get hung up on broker targets, instead consider the underlying trend and macro context.
The 19 November update anticipated "a gradual return to profitability during 2013" after external accountants had stress-tested major projects and the chairman's current message is: "...these positive developments are a clear indication that the business remains robust and is rapidly returning to normal operations."
While oil and gas industry activity has defied recessions in various parts of the world since 2008, America's (so far) avoidance of its self-imposed fiscal cliff is a respite for cyclical shares like this; otherwise the dent to business confidence could work through globally. Bear in mind that there will soon be another challenge, as breaching the US debt ceiling will trigger $1.2 trillion public spending cuts over 10 years, the next tussle for the US government.
At about 110p a share, Lamprell could be trading around 10 times, or the low teens, its median historic earnings, and there is a tendency for recovery shares to enjoy a high price/earnings multiple well before better trading emerges. Upside is also favoured by the thorough change of top management being made, including a new chief executive from March who has a strong background.
So there is plenty to play for, while appreciating this is currently a speculative, not investment-grade, cyclical share.
For more information see lamprell.com.