Interactive Investor

Edmond Jackson's Stockwatch: Is Lamprell a textbook turnaround?

20th May 2014 00:00

Edmond Jackson from interactive investor


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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.

FTSE SmallCap oil rig maker Lamprell has declared a respectable trading update along with a $120 million (£71.5 million) rights issue - to use for investment as its markets improve, to repay specific borrowings and provide working capital flexibility.

A rights issue is a typical feature of a company turnaround, but usually shareholders first want to see a new management team stabilise the situation.

Lamprell has the advantage of 35 years as a market leader in the Middle East, so this turnaround should not be complex - instead, it will be a case of getting the essentials of the business right after the previous management team went awry on various contracts and ran up debt.

Even so the rights issue terms - five shares offered for every 16 held, at a price of 88p - represent a near 40% discount to Lamprell's recent market price, as if the offer had to be priced attractively.

Lamprell - financial summary
Consensus estimate
Year ended 31 Dec 2009 2010 2011 2012 2013 2014 2015
Turnover (£million) 263 322 739 631 662    
IFRS3 pre-tax proft (£m) 17.6 41.7 40.8 -71 19.3    
Normalised pre-tax profit (£m) 17.5 27.6 47.4 -68.6  24.6 25.5 36.5
Normalised earnings/share (p) 7.93 12.5 19.8 -26.5 9.2 9.8 14
Earnings/share growth rate (%) -17.3 58.1 57.9 6.1 43.1
Normalised P/E multiple (x)         15.7 14.8 10.3
Cash flow per share (p) -6.61 67.1 -19 54.1 22.5    
Capex per share (p) 5.05 7.14 15.3 4.37 3.32    
Dividend per share (p) 1.98 4.54 8.32 5.15 3
Dividend yield (%)         2.1
Covered by earnings (x) 4.5 2.9 2.5 4.7
Net tangible assets per share (p) 65.5 81.6 74.9 44 53.5    
Source: Company REFS.

It most likely relates to recent delays in project awards meaning 2014/15 revenues will be slightly lower.

At end-2013, the group order book was valued at $900 million against $1.1 billion at end-June; however this is in context of a bid pipeline of $4.7 billion at end-2013 and $4.6 billion at end-June; so there is plenty of scope for order conversion despite the softer revenue trend.

In such circumstances the institutional owners may have pressed for this extent of rights' discount, as fair compensation until the turnaround is fully proven.

The matter was made plain in the outlook statement within Lamprell's end-March prelims for 2013. 88p appears a reasonable compromise without adding excessively to dilution.

Obviously per share forecasts will need adjusting in due course; the two forming the brokers' consensus in Company REFS (see table) were made last March and early April; however the essential trend remains, that management expects 2015 to be a defining year.

The price/earnings multiple should reduce usefully then (pre-rights, the forecasts implied a drop from about 15 near 10 times) and one broker also felt a 3p a share dividend is possible. Overall it looks very much in shareholders' interests to take up the rights offer although you could also sell your "nil paid" rights for the difference between 88p and the prevailing market price.

I drew attention to Lamprell at 110p on 4 January 2013 along a recovery theme after a banking-waivers and contracts update provided early-stage evidence the new team was getting to grips.

Restore earnings and dividends

Assuming supportive demand for its services it should be possible for Lamprell to substantially restore its earnings and dividend capability - although 2011 was likely an exceptional year.

Oil prices are remaining firm partly in response to the Ukraine crisis and without a nasty surprise from the Chinese economy they look unlikely to plunge. Shale gas is the contentious issue: whether it increases spare global capacity of oil and gas or proves insufficient to meet demand growth.

Yet the industry remains busy thereby offering Lamprell the opportunity to leverage its strong market position - especially in new build jack-up rigs and offshore construction markets. Current strategy prioritises existing markets for rig construction and refurbishment, with better productivity and an improvement in service to ensure customer satisfaction.

So while Lamprell's chart has looked unexciting for the last 18 months, the current period looks useful to accumulate Lamprell while the stockmarket plays a waiting game for more proof.

Valuation is largely about earnings in the absence of a dividend and lack of tangible asset backing versus the share price; so the crux is how margins and (eventually) revenues pick up to impact earnings per share.

The management appears to be doing well under a new chief executive since March 2013 and in key respects Lamprell is becoming a textbook turnaround.Its 2013 results showed profitability restored, on flat revenue, and reassurance that a high level of bidding activity should translate into contract wins. It being difficult to assess competition when watching from the side-lines is another reason for the extent of rights' discount.

With fresh money it will be interesting to see what extent of rights' take-up by management is confirmed next month; if they are genuinely confident then they should push by whatever means (e.g. personal borrowings) to ensure this. Otherwise there has not been recent evidence of director/senior manager share buying.

The medium-term trend quite depends also on general "risk-on, risk-off" sentiment swings, so if you are cautious that stockmarkets may be exposed to volatility this summer then maybe watch and wait for dips to average-in.

Last year's interim results were end-August so some potential investors may prefer to see more proof of the contracts promises, which could also keep the share price muted until then.

But overall the risk/reward profile on the stock looks to be improving and it should be possible to target double-digit upside for the medium term. It is likely going to need something unexpected in the wider economic and political context, to provide another bout of jitters.

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