Lamprell PLC – Time to buy in?

http://www.lamprell.com/

Lamprell PLC (LSE: LAM) is a UAE based oil equipment and services company with interests involving providing contracting and engineering products to the oil and gas industry as well as the renewable energy industry. Some of the areas they specialise in include the construction of jackup drill rigs, rig refurbishment, feasibility studies and the management of safety through the control of toxic H2S gases. Clearly, Lamprell has a diverse set of operations leading to it having a market cap of £223m with 260m shares in issue.


Lamprell has had a start of the year to forget entering 2012 with a price of around 290p, peaking at around 360p, but since plummeting to hit lows intra-day of circa 70p. In previous years Lamprell has been performing well, benefiting from an increase in demand for their services post 2008, revenue being $503m in 2010 soaring to $1147m in 2011. However, the company has been plagued by triplet of profit warnings beginning in May when it announced that a shortage of equipment globally, postponement of a few contracts and overruns in costs on wind farm machinery led to a fall in their profits. This was eloquently put as ‘Progressive delays in key equipment deliveries for new rigs together with slippage in project awards and deliveries’. The three profit warnings are illustrated by the arrows on the chart. Following this they mentioned that profits are now expected to be almost $80m less than estimates – a shocking decline, but they also noted that revenues are expected to be flat with sales simply pushed back, and they will come into effect in the coming years.
 

Interestingly Lamprell also said that they expect their profit margin to increase from 3.5% to 7.5% next year. This did little to stop the share slipping almost 60% on the day. And this may have been elevated after Directors in the company sold shares less than 3 weeks before the trading update. This poses some threat to the shares, although it is likely to emerge that it’s little more than poorly time transactions. The company was then forced to leave the FTSE250 and this probably intensified the downward share price movement as ETF’s had to sell.

The second profit forecast arrived in early June, with initial expectations of a circa $17.5m loss for H1 2012. The profit margin was also slashed from 3.5% to 2.5%. This further forced it share price down towards 70p where it was first to make a ‘bottom’. Lamprell’s margin was 5.5% in 2011 and 12.9% in 2010. This gives hope to 2013 being prosperous for Lamprell considering their expected 7.5% profit margin. The chairman Jonathan Silver stepped down following this announcement.

The final profit warning came in mid-July, sending the share price down 40% again after it had enjoyed a short rally back up over 110p following a $121m contract award for a vessel for ‘SeaJacks’. This is encouraging as the award came in following the second profit warning and emphasises the customer’s confidence in Lamprell. In the third profit warning Lamprell noted that additional costs from delayed deliveries will push the already $17.5m loss to $45m for H1 2012. They also said, "As a result of these anticipated first-half losses, Lamprell will be seeking waivers from certain of its banks in relation to its banking covenants". Whilst this may be the case Lamprell aleady has a net tangible asset value of 75p, which should limit further downside, and they have over $80m in cash so it is widely expected they will achieve the covenant waivers.

Whilst the updates are clearly disappointing, I believe that Lamprell shares now offer good value for money. The current share price rivals the sort of prices that could have been bought at following the 2008/2009 crisis. From a technical point of view, the chart above further solidifies the likelihood of a rise after the share posted a neat ‘double bottom’, often which the share price rises off of. Fundamentally, Lamprell is an industry leader and with soaring energy demands worldwide, the only threat to Lamprell’s increasing revenues is that of a global recession. Should this not materialise Lamprell shares offer good value in the coming six months to a year. Lamprell also issues a final dividend to 5.03p/share. What makes the company more interesting is that it appears to be at a significant discount after it acquired ‘Maritime Industrial Services’ for around £230m in 2011. The significant cash haul should satisfy short term debt, with the only risk that of a lowered interim dividend. 

At 86p/share, Lamprell offers a medium risk/high reward option that could recover in 2012 and prosper in 2013.