As a result the share price is now sitting just below the 200-day moving average at 263p. As I have noted on several occasions this year, the time to buy shares in bull runs is when they retrace previous rallies and test the long-term trend line. In the case of Thalassa, I feel this is an opportune time to buy into a high growth company at a very favourable price and one that should look a smart move in a few months time. It is also supported by the technical set up as the 14-day relative strength indicator (RSI) appears to have bottomed out and with a neutral reading of 40 is nowhere near overbought territory so offers plenty of scope for the rally to continue. For good measure, the moving average convergence divergence indicator (MACD) is above its signal line, having just made a cross-over.
Sound fundamentals
The fundamental case to invest is positive too. To recap, Thalassa provides marine seismic equipment and, in particular, a technology called Portable Modular Source System (PMSS™). This equipment is installed on vessels to provide a seismic source to enable oil and gas exploration and production companies to perform life of field seismic studies or permanent reservoir monitoring.
It is proving a highly profitable niche to be operating in as Thalassa’s revenues more than doubled to $30.6m (£18m) last year, and with the benefit of a hike in margins, operating profits surged from $1.5m to $4.2m, bang in line with upgraded analyst estimates.
That was in part down to a contract worth $85m (£50m) over a nine-year period with Norwegian energy giant Statoil ASA (STL:NYQ - $31.53). As part of the agreement Thalassa provides long-term seismic acquisition services for permanent reservoir monitoring of the Snorre and Grane oil fields in the Norwegian sector of the North Sea. Other contract wins include one with SMG Ecuador, the Ecuador business of State Sevmorgeo Company, the Russian geological sea survey company.
Since the financial year-end, the company has won a further $4m (£2.35m) contract with Nasdaq-quoted SAExploration (SAEX:NMQ - $8.92) to provide shallow water source handling and deployment services for seismic acquisition projects in the North Prudhoe Bay, Alaska. Mobilisation starts shortly and the survey will last until October. Thalassa will assist SAExploration in developing a shallow water source handling and deployment system with the aim of boosting productivity during the short summer weather window.
At the last count, Thalassa had $142m worth of potential orders in the pipeline. Clearly, some of these will take time to conclude, but expectations of new work are pretty conservative in analyst estimates so this is more a case of the company under promising and over achieving, something I feel comfortable with.
In any case, Thalassa is well financed to fund the new business when it comes on stream, having raised £22.6m through institutional placing of shares at 250p last October, and 120p a year ago, to provide the working capital to service a record order book. The funds raised have enabled Thalassa to carry out a $10m capital expenditure programme to refurbish two compressors acquired, upgrade some of its existing systems, build a mini-PMSS™ system in advance of undertaking work in the high resolution 3D sector.
Betting on an earnings beat
So given the favourable backdrop of a strong order pipeline and likely new contract wins, it’s still realistic that analyst earnings estimates could be surpassed. That’s because brokerage WH Ireland has only factored in that a quarter of the tender pipeline will be converted into firm contracts this year and next. On this basis, current year revenues are predicted to rise by a fifth to $36.5m to produce pre-tax profits of $5m and EPS of 16.9¢. The respective forecasts for 2015 are turnover of $41.6m, pre-tax profits of $6.1m and EPS of 20.7¢. The EPS figures have been adjusted to reflect the greater number of shares in issue post the share placings.
On that basis alone the shares are worth buying because Thalassa’s cash pile ended last year at $32.2m (£19.4m) and, even after factoring in capital spending plans, is expected to end this year at around $28.5m, or 70p a share. Strip out that cash and at 255p, the shares are priced on 18 times current year conservative earnings estimates.
But that rating drops like a stone if we assume that a more realistic $45m of contract wins come through from the $142m pipeline for completion in 2015, as I anticipate, against current forecasts of $30m embedded in WH Ireland’s numbers above. Assuming a gross margin of 28 per cent, this would imply 2015 EPS of 34¢, or 20p a share. In my opinion, that looks a feasible outcome and if achieved the cash adjusted multiple falls to a bargain basement nine times earnings.
So with the company in an earnings upgrade cycle, I believe the shares are undervalued even though they have made decent gains since I initiated 14 months ago at 138p (‘Potential for seismic gains’, 19 March 2013). In fact, I have no qualms at all about repeating my buy recommendation and maintain a price target of 350p, well below WH Ireland’s target price of 400p. Trading on a bid-offer spread of 245p to 250p, a price worth taking in advance of the closure of major contracts in the pipeline, I would use the sideways share price move as a decent buying opportunity. I am sure some of the investors attending a presentation made by Thalassa's chairman Duncan Soukup yesterday morning at house broker WH Ireland will come to the same conclusion.
Please note that I am still working my way through a list of companies on my watchlist including: Inland (INL), API (API), Charlemagne Capital (CCAP), Oakley Capital Investments (OCL), Taylor Wimpey (TW.), Barratt Developments (BDEV) and Bovis Homes (BVS).
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