Interactive Investor

Insider: this cheap share price is ‘wholly inappropriate’

12th October 2020 10:22

Graeme Evans from interactive investor


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Directors at these two companies have been snapping up stock at rock-bottom prices. Others have followed.

A 16-year low for Hunting (LSE:HTG) shares amid oil price and US presidential election uncertainty has presented a buying opportunity for management at the well services company.

Hunting, whose Titan division is focused on the US shale market, disclosed on Wednesday that Houston-based CEO Jim Johnson bought £61,000 worth of shares and finance director Bruce Ferguson acquired £17,000. Both trades took place on Monday at prices around 122p.

The former FTSE 250 index stock had been at 423p in January before the Covid-19 shock sent the West Texas Intermediate oil price as low as US$17 dollars a barrel in April, and caused the number of onshore US oil rigs to slump by 68% to 254 over the first half of the year.

The use of Hunting’s perforating guns, energetics and instrumentation tools in the shale oil Permian Basin region of West Texas has been a significant contributor to Titan’s sales.

The industry crisis led Hunting to resize its business, but it still retains a strong balance sheet and recently declared a dividend worth $3.3 million for payment to shareholders on 23 October.

The stabilisation of the oil price at about $40 dollars a barrel has also encouraged the resumption of some US drilling activity, but the overall outlook remains highly uncertain as the White House election draws near.

There are fears Joe Biden's policies on climate change could slow growth in the US shale oil and gas industry, although the Democratic Party candidate insisted in August that he had no intention of banning fracking “no matter how many times Donald Trump lies about me”.

Last week, analysts at Barclays Capital described Hunting's current valuation as “wholly inappropriate” and pointed out that shares were now trading at a 30% discount to inventory plus net cash and at a 40% discount to its working capital.

They added:

“Yes, a market downturn could lead to a repricing of inventory, but even at half price, the share price is covered.”

Barclays has a price target of 260p, noting that Hunting shares are underperforming the sector by 40% and that a current valuation multiple of 0.3 times sales compares with recent deals where shale-related equipment manufacturing businesses have attracted a 1x multiple.

The bank added:

“We consider the stock to be materially undervalued and question whether the company should be using significant upcoming cashflow to look for bolt-on acquisitions or buy back its own shares.”

Hunting shares were one of the top performers in the FTSE 250 index in 2018, when rising oil prices and exposure to the shale drilling boom led to the reinstatement of the dividend after a two year absence and a share price above 900p.

Johnson has been in charge since September 2017, having spent more than two decades with the company. Hunting dates back to the 1870s and joined the London Stock Exchange in 1989.

The challenging market conditions mean it has reduced its headcount from nearly 3,000 people to just over 2,330 in 11 countries, with Titan among the divisions bearing the brunt after mothballing its manufacturing facility at Oklahoma City and releasing 268 staff in the half year.

Titan still retains its market leadership within the US onshore completions sector, while the division has continued to launch new products in the face of the crisis. 

The wider Hunting business is also developing its revenue streams in non-oil and gas markets, with the acquisitions in the last year of Enpro Subsea and RTI Energy Systems rebalancing its product offering to areas less sensitive to movements in commodity prices.

Headlam shares climb off the floor

Shares in floorcoverings distributor Headlam (LSE:HEAD) have also struggled to recover from their Covid-19 lows, despite the company revealing in September that it had returned to profitability during the second half of the financial year.

With the stock trading at an eight-year low of 266.65p, non-executive chairman Philip Lawrence bought 11,184 shares on Thursday in an investment worth almost £30,000.

His move follows a fall for the share price from 540p in January. The temporary closure of operations in the UK meant half-year revenues were 30.6% below last year at £242.1 million, with underlying losses of £1.2 million comparing with a £17 million profit in 2019.

 All its major distribution centres re-opened by May and its retail customers followed suit a month later as July sales exceeded the same month a year earlier. The company added in the recent half-year results that its operational improvement programme left it well placed even in the event of a second wave of Covid-19.

It has reduced net debt and extended revised banking covenant tests while making no recourse to additional or other financial support.

The company grew through acquisition in the 1990s, becoming the UK market leader before moving to a more unified operating structure after Steve Wilson took over as CEO in 2016. Lawrence has been chairman since 2018, having been CEO of the Coal Authority for 11 years and holding significant roles with Marconi and Deloitte before that.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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