In the circumstances, I have been looking for more undervalued sector plays to exploit. In particular, I have been screening for shares in companies that based out in early December, a full month before the oil price hit its low of $44 a barrel in mid-December. That's because energy stocks lead the oil price, not the other way round, so their base formation should now be coming to an end, thus providing potential for a tradable chart break-out. I have already noted that this was the case with Faroe Petroleum (FPM: 83p), and feel that the same is true of Aim-traded Getech (GTC: 45p), a geoscience company specialising in the provision of data, studies and services to the oil, gas and mining exploration sectors. Director Peter Stephens and his wife Veronica clearly have had the same thought as they purchased 125,000 shares between them at the end of last year at prices between 44p to 51p. This takes their combined shareholdings to 988,000 shares, or 3.26 per cent of Getech's issued share capital.
Interestingly, from a technical perspective, there has been an important chart break-out. Having hit a low of 34p in mid-December, the price re-tested that price point on no fewer than two occasions. The support held and yesterday the price took out the top of the trading range (42p) that has capped progress for the past two months. Moreover, with the 14-day relative strength indicator (RSI) showing a reading in the early 60s, and the moving average convergence divergence (MACD) momentum indicator above its signal line, the odds favour a continuation of this rally in my view. In fact, expect a sharp rally back to the November highs around 52p and beyond that the September highs of 67p are a very realistic target.
Supportive fundamental case for investing
Importantly, the fundamental case for investing is supportive. Underpinned by a $5m (£3.3m) contract with the Angolan National Oil Company, Sonangol, which has responsibility for overseeing and managing the oil and gas exploration and production in the Republic of Angola, analysts predict that Getech's revenues will rise from £6.6m last fiscal year to £9.1m in the 12 months to the end of July 2015. On that basis, expect underlying pre-tax profit to more than double to £2.2m and with net cash of £3.4m on the balance sheet, equating to 11p a share, there is even the prospect of a raised dividend. In fact, even though profit declined last year, Getech's board hiked the payout per share by 10 per cent to 2.2p when announcing full-year results in early November. Analysts are pencilling in a 4 per cent rise in the dividend this time around to 2.3p a share, covered 2.5 times by prospective EPS of 5.5p. This means that the shares are currently being rated on eight times forward earnings and offer a forward dividend yield of 5.1 per cent.
It's well worth noting that the Sonangol contract, announced in September, is the largest in Getech's history and the vast majority of the $5m revenue from it will be earned in the current fiscal year to the end of July 2015. This gives me a fair degree of confidence that the company will meet the aforementioned current year market forecasts, so avoiding the profit warnings last year which led to a precipitous decline in the share price. In terms of the work involved, the aim of the project is to generate structural and related interpretations for the geological basins of Angola and involves gravity and magnetic data interpretation, structural mapping, plate modelling, palaeogeographic reconstruction and palaeodrainage analysis. The project also requires the integration of large datasets including seismic and well data in order to form a comprehensive interpretation and framework for future exploration across the region.
In addition, Getech announced at the end of last year a three-year extension to a previous contract with a long-standing client whereby the client may purchase Globe, Getech's live GIS earth platform that delivers state-of-the-art palaeogeographic reconstructions; regional reports that highlight key exploration opportunities, from continental to sub-basin scales; and data and commissions work using Getech's extensive commercial library of gravity and magnetic data, including geological maps, topography/bathymetry, drainage, geochemistry and radiometric data. The total value of the first order from the client is worth £400,000, all of which will be delivered during the current financial year.
I would also flag up that Getech has been in discussions with clients and, according to chief executive Raymond Wolfson, "there is clear intent to include our products in their 2015 budgets". In other words, not only are current financial year forecasts well underpinned but there is potential for new awards both this year and next.
A sensible valuation
So, with the company's business recovering strongly from a poor 2014, and contracts in place to support earnings expectations, I feel that the shares should not be rated on a near 50 per cent earnings discount to the market average. True, and as analyst Eric Burns at broker WH Ireland rightly points out, "putting a value on Getech is an imprecise science as it almost certainly fails to capture the substantial embedded knowledge of worldwide hydrocarbons amassed over its 28-year history".
And, of course, there has to be some ratings discount for the fact Getech is an Aim-traded company with a market capitalisation of just £13.6m, so the shares will be far more volatile due to liquidity and volatility of earnings. Indeed, pre-tax profits declined by more than half from £2.2m to £1m last fiscal year to the end of July 2014 on revenue down 18 per cent from £8m to £6.6m, highlighting this operational gearing effect on profit from changes in sales.
However, this works both ways, which is why we can expect such a strong earnings recovery this fiscal year, and one underpinned by increasing interest in the company's product suite from national oil companies and from data sales in the US (where exploration spending still remains high). These factors should more than compensate for the overall negative impact of the declining oil price on capital spending plans in the upstream sector, and the inevitable cyclical reassessment of discretionary expenditure plans by oil and gas companies, both of which contributed to the profit shortfall last year.
In any case, the tide had definitely turned in the final three months of 2014 as the benefits of a raft of new contract wins were felt including securing six awards for the company's satellite gravity project and contributing an income in excess of £1m. Prior to this, Getech won two contracts for US domestic data sales worth $1.1m (£700,000).
So, with the shares lowly rated and offering a chunky dividend yield, the share price basing out, director share buying, and a chart break-out looking imminent, everything points to a continuation of the share price rally that commenced at the end of January. My three-month target price is 67p, equating to a cash-adjusted fiscal 2015 PE ratio of 10. On a bid-offer spread of 43p to 45p, and offering 50 per cent potential upside, I rate Getech's shares a buy.
■ Simon Thompson's 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 stockpicking'
