Thalassa Holdings - A Buoyant Journey

Thalassa Holdings Logo

With the AIM market having shed over 100 points in recent weeks, there are many companies that are now trading substantially off their highs, despite being in sound fundamental positions. Thalassa Holdings (LSE:THAL) fits that criteria. Having traded at highs over 300p during Q1, the shares have rapidly, and unjustifiably retreated in recent weeks to the extent that they now trade at just 204p, a retreat of around 33%. The company has made significant strides in recent years, and that is reflected in its share price rise from its 50p admissions price, yet Thalassa still looks to be worth backing. The company is currently capitalised at £51.1m through having circa 25 million shares in issue. As an oil equipment and services company, Thalassa looks set to continue to outperform its peer group.

The technical situation with Thalassa partially explains the downturn in the company's share price over the past couple of months. Following a double-top in Q1, the shares commenced a downward trend that was confirmed when the company failed to make headway during the release of an excellent set of full-year results. The shares then broke through the 200 day moving average, which was a bearish sign in itself, before then breaching the all-important 250p support zone. That hinted at a return to 200p, which looks set to complete. Given the very oversold position of the shares, plus the likely material support at 200p, it is highly likely that current levels will mark the end of a very aggressive share price downtrend. The heavily oversold readings on both the MACD and RSI suggest that any rebound will be swift, with a very short-term target of 225p. More importantly, it would likely mark the end of the correction, and mark the start of a sustained rise. Moreover, the fundamental position is largely unchanged compared to before the price drift, which is the bottom line.

The shareholding structure of the company shows strong institutional interest, especially with the most recent placing being conducted in H2 2013. Henderson Global Investors hold a large 17.7% stake, with the Thalassa discretionary trust (to hold shares to reward staff) holding 12.3%, Standard Life holding 8.7%, Lynchwood Nominees holding 6.3%, and Hargreave Hale holding 3.2%. The obvious downside of such heavy institutional interest is that, if an institution wants to cut down their stake, it can lead to a large retreat in the share price. However, as long as the fundamental picture remains bright, it is probable that the excess stock will be taken up by other institutions or retail investors. In addition, Henderson took that stake during the 250p placing, so it would not make sense for them to shed the shares at a loss. Positively, Chairman Duncan Soukop holds 12.4% of the shares in issue, so is inherently motivated - his level of salary is also re-assuring given that he held it constant during 2013 at $200,000, despite substantial share price and operational progress. His interests look to be well aligned to that of shareholders. The spread on Thalassa's stock is currently less than 1%.

When Thalassa listed on AIM, its share price flat lined for years, just above its 50p admission price. Once the financial crisis hit, unsurprisingly, Thalassa's shares fell, but that eventually helped to ignite the stock, with it now up almost 10-fold on the lows it made during the crisis. Thalassa is actually a holding company for two separate oil and gas services businesses:
- WGP Group = A Marine seismic services company for both the exploration and production sub-sectors
- GO Science = An Automated Underwater Vehicle (AUV) research and development company

WGP is very much the bedrock company, contributing the balance of revenues and profits for the Group, with GO Science presenting technological upside. The company essentially offers seismic services - seismic services are usually required when a company is searching for oil and gas. The surveys send shocks through the rock, which sensors pick up, and this allows an underground image to be formed, based on the time travelled for the waves to be received by the sensors, the strength of the signal, and many other factors. Seismic can either be onshore or offshore - Thalassa focuses upon the offshore element through the provision of bespoke services. The company specialises in the provision of 4D Life of Field Seismic (for producing assets), Marine 2D towed streamer & seabed seismic and high-resolution 3D towed streamer seismic, albeit it covers many other types. In addition, it provides geophysical project management and consultancy. These services are near essential for oil and gas companies, especially since they are always looking to reduce exploration risk, but also maximise returns from any particular asset (which the 4D LOFS can help with).

Estimates are that the seismic data acquisition market will continue to grow at 10-15% per year, with Statoil looking to increase their underwater field recovery rates to above average industry levels of 60%. That said, many Oslo listed companies, and core players within the market are enduring a challenging period in terms of revenue growth and retaining margins - others have commented upon flat lining market conditions. Forecast growth rates will ultimately vary by source. What is important is that Thalassa has a very credible customer base, which includes Statoil, and has seen them complete work ranging in regions such as Ecuador, to the Russian Arctic, serving a wide variety of clients.

In fact, the Russian Arctic is one of the areas where Thalassa has had material operations. A 2014 report from Deloitte noted that 88% of surveyed industry respondents expect capital demand in the oil and gas sector to rise, with one of the core drivers of this being "the depletion of traditional light oil reserves" and the "resulting further development of the Russian mineral base in remote areas [in the Arctic Sea]". Ultimately, on a larger scale, the long-term demand for the services across the industry will depend on the oil price. A higher oil price will increase spending, but there will be a time lag. Crucially, as an individual (and relatively small) player within the market, that does not need to be a strong consideration at the current point in time.

The bucking of the wider trend can most clearly be seen over the past year. During 2013, the company secured a contract for the manufacturer of a Dual Portable Modular Source System (D-PMSS) for Norwegian giant, Statoil, with the contract being valued at $19.8m. A PMSS provides the seismic source (a.k.a. the tremor) for surveys. The contract was completed in October 2013, but was followed up by a second contract, also with Statoil. This involved the provision of long-term seismic acquisition services for the permanent reservoir monitoring of 2 oil fields in the North Sea. This contract has an initial value of $32m, with possible extensions taking that value up to $65m. The importance of a reference deal such as this cannot be understated. It firmly put Thalassa on the map within the industry and demonstrated expertise to future potential clients.

The strong 2013 performance has been carried into 2014 through penning a $4m contract with SAExploration in February, before WGP announced its intentions to take part in a Multi-Client acquisition scheme with TGS-NOPEC, for 10 blocks in the Barents Sea (near Norway). This involves WGP and TGS jointly acquiring seismic data for the blocks, and then selling the data to multiple clients - some of these clients pre-order the data, with others buying afterwards. There is no limit on the amount of data that can be bought between them given that it is non-exclusive, although there was a lower limit in this case given that it was partly underwritten.

Chairman Duncan Soukop commented: "We are very much looking forward to working with TGS on our first Multi-Client project. We will be deploying our new mini-PMSS™ specifically designed to operate with the P-Cable™ system. Multi-Client work differentiates itself from traditional seismic in that ownership of the seismic data is retained by the operators (in this case, TGS and WGP), rather than any one individual client, allowing the operators to sell the data to multiple clients, hence the term 'Multi-Client' seismic. Whilst there is potentially more risk associated with Multi-Client work, in this case any exposure for WGP is not material and end profitability has the potential to be significantly higher"

This was then followed up by a service order for a seismic survey in the North Sea, albeit no financial details were disclosed, apart from that it would make a 'meaningful contribution' towards the growth expected in 2014. Impressively, the group entered the year with a significantly strengthened potential order book, that totalled $142m compared to $91.5m in 2012. That bodes well going forward, especially if they can secure a third or more of those levels.

Part of one of the submersible vehicles
The GO Science (abbreviated GScience from now on) side of the business is completely different in terms of maturity. Thalassa acquired GScience in late 2013 at an initial cost of £1.86m - this gave them access to GScience's early stage proprietary technology. The subsidiary has developed a mobile, sensor grid services system, which involves the use of controllable, unmanned submersible vehicles to undertake a seismic survey efficiently and safely, in water depths exceeding 2000 metres. In plain English, a ship is mobilised to the area where seismic needs to be shot. The vehicles are dropped into the water where they form an interconnected hexagonal grid. The grid then moves to the precise survey location, and couples to the seabed. A seismic projector towed behind the ship is then activated with sends out the shock waves. Having 'bounced' off the seabed and formed an 'image', these waves are picked up by the sensors on the vehicles, and are logged. The seismic shot has then been completed; the grid will move to the next seismic shooting location.

Despite the technology being relatively early stage, it could potentially be disruptive, and has already undergone feasibility tests in previous years. The results showed the potential for "major cost reductions" when compared to 4C/4D ocean bottom cable and existing ocean bottom sensor seismic survey technology. Moreover, the technology can be used in harsher weather (hence harsher water) conditions, meaning less downtime during adverse weather, and an improved proposition for customers. The precision of the method is a further advantage. Whether this will translate into firm orders remains to be seen, but the outlook is promising. The technology currently has 21 granted patents, with 33 pending, in 32 countries. The future of seismic very much lies in innovation, and the reduction of the high costs involved with seismic acquisition.

Turning to the financials, the progress is well reflected. The 2013 results showed:
- Revenues up 119% to $30.6m (£18.2m at current rates)
- Operating profit up 180% to $4.2m (£2.5m)
- Strong gross profit margin of 30.4%
- Diluted EPS up 160% to $0.26 (15.5p)
These headline figures are extremely encouraging, but they don't fully reflect the position of the group given that there was a large placing in H2 2013. The placing raised £18.1m in cash, and took the cash and equivalents up to £19.17m at the period end. Whilst that bolstered the balance sheet substantially, it ultimately hit the earnings per share figures, and is likely to have contributed to the capping of the share price at circa 300p. If we back-adjust the EPS for the new level of shares in issue, we get 10.4p, which would put Thalassa on a PE ratio of 19.6, which is far from cheap in this sense.

However, that's not an accurate reflection of the group. WH Ireland's 2014 forecasts are for £2.98m in pre-tax profits, which equates to 10.06p in EPS. 2015 forecasts are for £3.63m in pre-tax profits with 12.38p in EPS. Those amount to 20.3x and 16.5x earnings respectively. Once again, not cheap from this viewpoint, except when you consider that these estimates only factor circa 25% of the order pipeline being achieved. That is perhaps too low, and any beating of these estimates, will lead to upgrades. Moreover, we need to factor in the cash pile - it can definitely be defined as surplus. If we strip out £15m of the £19.17m in cash, then we get 29.33% of the market cap as being surplus. Taking it out, the market cap drops down to £36.14m, or 144p. That would amount to a very reasonable 14.3x 2014 estimates or 11.6x 2015 estimates. These are now attractive numbers given the rate of growth. Bear in mind that the large £18.1m placing was achieved at 250p, compared to the current price of 204p, and the discount at the time was only 16p.

The undervalued nature of the shares is reinforced by the nature of the balance sheet. There are non-current assets of £6.79m and current assets of £24.9m, yet only liabilities of £1.24m. Net assets therefore amount to £30.5m, and the vast majority of them are tangible. That translates through to 59.7% of the market cap, which is excellent backing and essentially means that the probability of any financial problems is low. The only slight issue at a first glance relates to the growth in receivables to £3.91m in the year, which meant that cash generation from operations was negative. However, the high profile status of the clients, combined with the fact that receivables were down to £2.26m as at mid-March, means that it's not an issue in my view.

Taking into consideration that the cash pile can be put towards the acquisition of equipment or of another company opens up a further dynamic. It can be used to boost the earnings per share growth potential moving forwards, and that is likely to lead to EPS estimate upgrades down the line. It's also worth pointing out that Thalassa materially beat broker estimates in 2013, and over the past few years has developed a track record of rapid growth.

Looking forward, the company intends to pursue organic growth, and has already set aside $10m for CAPEX in 2014. That will be partly funded by the cash pile, but will be assisted by the underlying cash generation of the group. New marine seismic contracts should be expected. There is the potential for expansions into new parts of the seismic chain, such as the data processing section, or alternatively the company could decide to invest more heavily in R&D, specifically 3D acquisition methods for Arctic exploration, or reduced (environmental) impact exploration methods. Further joint ventures have also been hinted at by the company, and I certainly would not rule out an acquisition - after all, the industry is largely fragmented, and open to niche players such as Thalassa.

It is for these reasons that Thalassa will probably re-start its upward trend over the coming weeks. The company has an established customer base, with which it is now enjoying long term recurring revenues and high-value extension opportunities. Operational and financial growth is strong, broker estimates look like they could prove conservative, plus the balance sheet largely supports a high valuation. WH Ireland has a 400p target for Thalassa. Whilst I think that is perhaps too high at the current point in time, an initial target of around 275p looks feasible given the highly oversold nature of the shares. Further upside is predicated on beating WH Ireland's pipeline conversion rate, and also on the successful deployment of the cash pile. It is absolutely the case that smaller, specialised companies can outperform a wider sector that may not be particularly buoyant, and I expect Thalassa to do just that. I have therefore put a Buy tag on Thalassa at 204p.

UPDATE (11/07/14) - I have moved Thalassa from Buy to No Rating well short of the 275p price target and at a loss at 194p. However, there is rationale for this. The past couple of months has seen the company struggling to rebound off 200p as a result of share sales by Henderson Global Investors who have been using a CFD as a hedge to dispose of their very large stake. That process does not appear to be near completing so it firstly makes sense to hold off until that position becomes clearer. Today the company announced a trading update saying that H1 was 'satisfactory' - in essence, the update was lacklustre and uninspiring and thus led to a fall in the share price. The failure to re-take 200p combined with the H1 results being pushed back to September (when the deadline is), does not bode well and the share price could realistically slip to 150p. It makes sense to cut losses short as it sound like the interim results will disappoint


  1. Really good summarisation of the investment case in Thalassa. I have been a shareholder of the company since the 120p days and think that there is much more to go yet. Raymond

  2. Excellent article El1te. The company looks very oversold for one reason or another :0|!


  3. Very neat summary El1te. The line I most agree with is that small players can flourish in a floundering market. There are plenty of examples of that. Look at Lidl and Aldi two niche low price supermarkets who are snatching market share off sainsburys, tescos and morrisons. Also look at Good Energy [good] who are flourishing in the energy market due to their niche green credentials and dedication to clean energy. Good stuff


  4. Excellent research as usual. Thanks El1te.

  5. Hi el1te,
    re HGI holdings
    In the RNS Hodlings in Company on 29/08/2014, HGI have changed their section C disclosure from CFD to Warrants. What's your take on that?
    Thank you in advance.

    1. I suspect it is simply another method of hedging whilst they potentially continue to dispose of their stake.