Edmond Jackson's Stockwatch: Lamprell

In a March comment piece on FTSE SmallCap company Lamprell, I noted that "besides ongoing contract news, a restructure of debt facilities is the next milestone to watch for", and this has now been achieved.

The Dubai-based oil industry services group reports in US dollars, and its new $181 million (£115 million) facility comprises two loans of $100 million and $60 million and a $21 million revolving credit facility - all to mature in June 2016, albeit with the first loan amortising over the period and an option to extend the second by a year.

The average interest rate is estimated at 6.7%, presumably with regard to the risks while also enabling Lamprell to progress its turnaround. Significantly this enables the group to proceed without a rights issue, after dilution or a loss of control to creditors was feared when problems intensified last July. It marks a key step to de-risking the group, improving the shares' risk/reward profile.

The chart is quite jagged since I advocated the group as a recovery share for 2013, at about 100p, and reiterated this in January. Its price recently tested 180p then fell briefly below 140p and is currently just under 150p.

A share like this is prone to get swayed by the "risk on/risk off" sentiment swings dominating markets, hence investors need to keep a measure of the turnaround that is evolving. A trailing stop-loss approach would have triggered a 'sell' order after the fall from a 179p one-year high, but this volatility is more to do with quantitative easing (QE) driven greed in markets turning to fear, while Lamprell's turnaround is proceeding to plan under a new chief executive and finance director.

Another key concern has been whether client loyalty would erode following mismanagement issues that erupted last year. The operational update within the 17 May interim management statement conveyed resilience: "The various major engineering, procurement and construction projects currently underway in each of Lamprell's three large facilities in the United Arab Emirates are progressing according to plan."

A strong position in oil rig-refurbishment projects in the Middle East was central to why I thought there was a decent chance of a turnaround. The market has looked robust due to the fairly long lead times clients have to operate around; and global energy demand sustaining oil prices. This also improved the odds that bankers would support the company towards a refinancing.

Bear in mind that any drop in oil prices is liable to knock sentiment towards oil industry services shares, as markets would anticipate a slowing in companies' order books. Oil demand needs watching, especially with regard to developing countries, where credit risks are increasing.

Lamprell says it "maintains a substantial order book extending to [the first quarter of] 2015 which at the end of April 2013 was $1.2 billion. The group's bid pipeline was then in the order of $4 billion..." This looks plenty supportive, just bear in mind that slight changes in (expectations for) the order book for example at Petrofac has created far more substantial changes in its market value (27% volatility from Petrofac's 2013 high to low). The market is looking very long term, or just being twitchy.

Consensus forecasts in Company REFS (see table) are based on just two brokers: Investec, which advised 'sell' on 22 May; and Arden, 'neutral' on 31 May. Both have upgraded their 2014 profit and earnings forecasts however. At 148p a share this implies an 18-month forward price/earnings multiple just over 10 times, although there is scope for variability on such a timescale, which also explains diverging share price targets of 114p to 175p on a summary of five brokers' views.

As regards the likes of JP Morgan Cazenove reiterating 'underweight' with a 114p target, I feel this can reflect analysts taking a cautious view, possibly after the humiliation of a 'buy' stance being trashed by events. Investec advises 'sell' but has still upgraded its target price from 90p to 145p. I would not be swayed by brokers' continuing negativity so long as the turnaround proceeds to plan and the macro context is reasonably supportive. It generally pays long-term investors to buy into industry-leading firms during a crisis that can be fixed, also subsequent months if sentiment is weak.

Announcements from 2013 portray a respectable turnaround, underlined by the latest news on debt facilities. In the short term, sentiment can still be hit by any of various macro risks - such as QE tapering, developing countries' credit and mounting worries over the Syrian conflict spreading in the Middle East.

Shareholders can take confidence in Lamprell's improving risk profile and if the price does drop amid market jitters, then it is another chance for buyers. The more significant risk is whether any of several potential crises may disrupt economic growth, meaning a fall in energy demand which could cause client hesitation for service providers.

Yet the forecasts of a resumed dividend for 2014, possibly involving guidance from management, show confidence in a robust turnaround. Holders can also take comfort from this if markets are set for a volatile summer.

For more information see www.lamprell.com.