The cause of the sell-off related to news that US/EU sanctions against Russia means that the $10m (£6m) of revenue scheduled for the second half from a contract with SMG Ecuador, the Ecuador business of State Sevmorgeo Company, the Russian geological sea survey company, is now unlikely to come through now. In the worst case scenario, Thalassa may be unable to recover $3.3m of non-cash trade receivables either or the $800,000 repatriation costs of the company’s equipment (currently in storage in Ecuador). The company has been contacted by SMG’s parent company to arrange an immediate meeting.
As a result, analyst John Cummins at broking house WH Ireland cut his full-year revenue estimate by the same amount from $36.6m to $26.3m. In 2013, the company more than doubled revenues to $30.6m. However, offsetting the revenue shortfall is a much better than expected margin performance.
In the first half, gross margins rose from 33.5 per cent to 43.7 per cent, so factoring in a full-year margin of 39 per cent (up from 28 per cent in 2013), Mr Cummins expects this improved profitability to soften the profit impact of the lower turnover. In fact, WH Ireland only cut its full-year pre-tax profit estimate by 10 per cent to $4.5m.
On this basis, expect adjusted EPS of 15.8 cents, or around 10p, for the full-year. True, this is down from EPS of 26.3 cents generated from pre-tax profit of $5m in 2013, but this also reflects the dilutive effect of a capital raise last October when Thalassa raised £18.1m from institutions at 250p a share to provide the funding needed to service a number of large contract wins. At the end of June, the company had net cash of $21.2m on its balance sheet, or £13m at current exchange rates. That sum equates to 52p a share alone, or 40 per cent of the current share price. It also means that after the 25 per cent share price fall yesterday, Thalassa shares are being rated on a very modest cash adjusted PE ratio of 8 for the 2014 fiscal year.
Contracts supportive of revenue forecasts
In my opinion, and although I failed to envisage the impact of EU/US sanctions on Thalassa’s Russian contract, that modest rating fails to acknowledge significant contracts already in place and which are supportive of the full-year forecasts. These include a nine-year contract with Norwegian energy giant Statoil ASA (STL: NYQ) to provide long-term seismic acquisition services for permanent reservoir monitoring of the Snorre and Grane oil fields in the Norwegian sector of the North Sea. Thalassa also has a multi-million dollar agreement with Nasdaq-quoted SAExploration (SAEX: NMQ) to provide shallow water source handling and deployment services for seismic acquisition projects in the North Prudhoe Bay, Alaska.
Combined these two contracts are expected to deliver $7m of revenue in the second half of 2014. In addition, sales from a multi-client contract with Oslo based TGS-NOPEC Geophysical Company ASA (TGS.OL), the supplier of geoscience data products to the oil and gas industry, as well as proprietary contracts scheduled to be executed before the year-end, are predicted to deliver the balance of the $10m second-half revenue in WH Ireland’s aforementioned 2014 forecasts.
The new funds have also enabled Thalassa to carry out a $10m (£5.9m) capital expenditure programme to refurbish two compressors acquired, upgrade some of its existing systems, and build a mini-PMSS™ system in advance of undertaking work in the high resolution 3D sector. 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.
Bumper pipeline of new business
Importantly, the company’s pipeline of business remains strong at a record $175m (£108m), so there is substantial business to potentially convert into more orders. That is a significant increase on the $142m pipeline at the start of this year. Let’s not forget either that the capital raise has provided the company with ample working capital to fulfil new bespoke field of life seismic contracts and demand is only likely to gain traction as more exploration and development majors look to implement the technology.
It’s also worth noting that the pipeline of new business underpins WH Ireland’s 2015 revenue forecast when the brokerage predicts a rebound in turnover to $30.1m to lift pre-tax profits to $5.5m. On this basis, expect EPS of 18.4 cents, or 11.4p.
True, it will take time for investor confidence to return, and WH Ireland has lowered its target price from 400p to 260p, but even so the investment case is still strong enough to warrant maintaining my buy recommendation even though the shares have now retreated all the way back to my original buy tip price of 138p (‘Potential for seismic gains’, 19 March 2013). At this depressed valuation, the company could even become a bid target.
Priced on a bid offer spread of 135p to 140p, I rate Thalassa shares a decent medium-term buy, albeit I have reduced my own 12-month fair value target price to around 250p, or the equivalent of 18 times 2015 cash adjusted EPS estimates.
Please note that Cenkos Securities (CNKS: 250p) has reported half-year results today. I will update my view shortly. I have also published another two columns today, both of which are available on my IC homepage...
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
