What's new:
■ Algerian contract delivers £14m loss
■ Brokers have cut forecasts
■ Chief executive appointment expected in two weeks
Oil & gas sector support services specialist, Cape, has revealed that delays on insulation work for a gas project in Arzew, Algeria, will mean a £14m hit to profits - to be charged with the group's half-year figures. The shares sank nearly 40 per cent on the back of that to 201p - their lowest level since June 2010.
News of big problems in Algeria isn't a complete surprise. With the group's full-year figures in March, for instance, management flagged up that the unique reporting structure in Algeria meant that the timing of work releases on the Arzew project had been considerably slower than expected with revenues in the year less than one-third of planned levels. Since then, however, and given the scale of this particular project, acting chief executive Brendan Connolly felt it appropriate to order an operational review, which took place in mid-May - and revealed that the project was heading for a hefty loss.
Mr Connolly says the new team is now in place in Algeria and that Cape will reorganise its executive structure, with the introduction of chief operating officers to improve oversight. He added that Cape expects to make an announcement in the next two weeks about a replacement chief executive after former boss Martin May stepped down on 29 March.
Northland Capital says...
Sell. While our forecasts are under review, factoring in the project loss means that our pre-tax profit estimate for end-2012 would fall by around 20 per cent to £58m. With the company having identified a loss making contract last year as well, this latest announcement raises further questions about operational control issues on specific contracts. We are therefore cutting our recommendation from buy to sell until there is greater clarity on the operational issues facing the business.
JP Morgan Cazenove says...
Buy. We view this as an isolated project and make only minor changes to our 2013 estimates, although we have reduced our 2012 estimates by 21 per cent and now forecast pre-tax profit of £60.2m, with EPS of 39.2p. We now value Cape at 551p - after reducing our price target multiple to 10 times and applying that to our 2013 earnings estimate. That multiple reduction reflects the poor execution on this large project which, we believe, will increase the discount to the sector the market will be prepared to pay. Moreover, that discount is justified given the less differentiated and low value nature of Cape relative to peers such as Wood, Amec and Petrofac.
IC VIEW
Such a painful slip-up won't be forgiven quickly and it's entirely possible that something worse could yet emerge. Despite the risks, however, Cape faces limited competition and boasts robust growth prospects - particularly in the Far East. Yet the shares now trade on just five times forecast earnings, which is too deep a discount to its oil services and equipment peers. Buy.
Last IC View: Buy, 440p, 6 March 2012
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