Underpinned by a firm order book, and good visibility on the future pipeline of contracted work and software sales, KBC's board anticipate hitting analysts full-year pre-tax profit estimates of £10.5m, up from £9.5m in 2014. It's certainly rare for a company exposed to the oil industry to be doing so well, but KBC's strategy has been to concentrate on key regions where it believes growth will emerge while at the same time proactively keeping costs in check in light of the difficult conditions in the energy market.
For instance, in the first half of the year, the company won £9m of new contracts in the Middle East and North Africa including ones with national oil and gas companies in Saudi Arabia, Kuwait, United Arab Emirates and Jordan. And because KBC's software enables businesses to reduce capital and operational spend, so producing attractive efficiencies for potential customers, there are good reasons for cost conscious clients to consider the company's offering.
The focus on downstream refining in particular, a segment accounting for 90 per cent of KBC's revenues in 2014, is another reason why business is holding up so well. Indeed, US Gulf coast crack spreads, an indicator of the gross margin earned by refiners, are close to a five-year high, having recovered sharply since the final quarter of 2014.
In addition, KBC's board have taken overheads out of the business to align the cost base with what is clearly a more challenging market environment. In the first half of this year head count was cut by 10 per cent, including the closure of the company’s New Jersey office, at a cost of £800,000. These measures are expected to generate annual costs savings of £3.4m. This slimmer cost base partly explains why KBC’s operating margins are predicted by analysts at research firm Equity Development to rise by 150 basis points to 14.7 per cent this year even though revenues are forecast to fall by 4 per cent to £73m.
A value proposition
It's also fair to say that there is clear value on offer in the company's shares and that fact alone is enough to support the current rally. That's because KBC's latest reported net cash figure of £15m is forecast by analysts to grow to £19.2m by the year end, a sum equivalent to 23p a share. That's significant in relation to a market value of £100m. Or put it another way, if you strip out net funds of £15m, then the company is being rated on 8 times current year operating profit estimates of £10.7m. To put that rating into perspective, the sector average multiple on this basis is 11.4 times operating profit, according to analysts at Equity Development.
Moreover, the valuation anomaly is even more glaring once you factor in the mergers & acquisitions activity we have been seeing in recent months. Indeed, when Schneider Electric injected its Invensys software business into FTSE 250 software company Aveva at the end of July, the unit was being valued on over 15.5 times operating profit on a standalone basis. KBC's simulation software accounted for 70 per cent of its annual profits in 2014, so even applying a lower rating for the company to reflect the contribution from less valuable consultancy activities, and the fact that KBC is a small-cap company, too, the ratings discount is simply too deep.
So having advised buying KBC’s shares a couple of years ago at 69p ('Fuelled for growth', 5 May 2013) and last reiterated the investment case when the price was 110p (‘Riding an earnings upgrade cycle’, 18 June 2015), I firmly believe a return to the 142p highs dating back to June 2014, and ultimately to my 165p a share medium-term valuation, are still very sensible targets.
On a bid-offer spread of 121p to 123p, and with a potential chart break-out in the offing, I rate KBC's shares a decent buy.
Getech doubles profits
KBC is not the only company with exposure to the oil industry that has been bucking the trend. Aim-traded Getech (GTC: 56p), a geoscience company specialising in the provision of data, studies and services to the oil, gas and mining exploration sectors, has announced that pre-tax profits for the fiscal year to end July 2015 have doubled to £2m on revenue of £8.5m, up from £6.6m in fiscal 2014. On this basis, expect EPS of 5.1p and a dividend of 2.3p a share when the company releases its results in about 10 weeks time.
Getech strategy has been to reduce its exposure to volatility in the market by focusing on major contracts with national oil companies (NOC) and signing multi-year contractual commitments with clients. In both respects the company has achieved successes: three major NOC contracts were announced during the financial year just ended, and longer term contracts include a highly successful multi-satellite project. While these awards have not made Getech immune from the turmoil in the energy market, the impact has been substantially reduced and as a result the company has been much more resilient than in 2009.
True, pre-tax profits were shy of the £2.3m forecast from house broker WH Ireland. However, this was still a robust performance especially as only one of the three NOC contracts, with Angolan NOC, Sonangol, commenced during the financial year. This contract was awarded in September 2014 and has a total value of $5m (£3.3m), the largest in Getech's history. I commented on it when I initiated coverage on Getech's shares at 45p ('Exploit a share price break-out', 10 Feb 2015). Importantly, all three NOC clients will generate significant income for Getech in the current financial year to end July 2016 which will reduce earnings volatility and underpin another step change in profitability.
Indeed, after factoring in a full contribution from the acquisition of ERCL, the Henley-based specialist upstream oil and gas sector consultancy which completed in May ('Buy-outs and bumper profits', 25 Mar 2015), and revenue from the three NOC contracts, head of research Eric Burns at broking house WH Ireland believes that Getech should be able to produce revenues of £10.8m, pre-tax profits of £2.7m, EPS of 6.2p and pay a 2.4p a share dividend in the current financial year. On this basis, the shares are priced on less than 10 times earnings estimates and offer a prospective dividend yield of 4.1 per cent.
But even that underestimates the value on offer as Getech had net funds of £4.7m at the end of January 2015. This means that after settling the initial cash consideration on the acquisition of ERCL I reckon the company has at least net cash of £3m on the balance sheet, or 9p a share. So on a cash adjusted basis, Getech's shares are trading on 10 times last year's earnings and only 8 times forecasts for the fiscal year to end July 2016.
Upside to estimates
Moreover, I feel there is upside to those earnings estimates if Getech lands its share of contracts in the tender pipeline, making it a pretty rare find in the oil and gas industry: a company in a positive earnings cycle and one buoyed by growing interest in its product suite from national oil companies and from data sales in the US. Bearing this in mind, it’s well worth noting the comments of non-executive chairman Stuart Paton who says that although the market is expected to remain tight, with uncertainty about the timing of recovery of the oil price, the board is "increasingly confident about the prospects for 2016 as a number of significant discussions have already, at the request of our clients, been aimed at inclusion of Getech products in their 2016 budgets."
In the circumstances, it's hardly surprising that investors warmed to the pre-close trading update at the end of last week. In fact, the share price looks ready to run up to the pre-oil price slump highs of 71p dating back to last September. My target price remains 80p, slightly higher than that of WH Ireland, and along with KBC I rate the shares my stand out value picks among small-cap companies exposed to the oil and gas sector.
Trading on a bid-offer spread of 55p-56p, valuing Getech's equity at £18.4m, the shares continue to rate a buy.
MORE FROM SIMON THOMPSON...
At the end of April, I published an article with all of the share recommendations I have made this year. Since then I have published articles on the following companies in the past 14 weeks:
■ Marwyn Value Investors: Buy at 220p, target price 260p ('Exploiting a value play', 5 May 2015)
■ Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p ('Repeat buy signals', 11 May 2015)
■ Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p ('Breakout looms for mobile wonder', 12 May 2015)
■ Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p ('Overseas property plays', 13 May 2015)
■ Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p ('Smashing target prices', 14 May 2015)
■ Bilby: Buy at 75p, target 100p ('Buy to build' growth play, 18 May 2015)
■ Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)
■ Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p ('Renewing old acquaintances', 20 May 2015)
■ Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)
■ Anite: Buy at 91.5p, target 110p ('Testing a break-out', 26 May 2015)
■ Character Group: Buy at 415p, target 525p ('Playtime', 1 Jun 2015)
■ Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p ('Hitting target prices', 2 Jun 2015)
■ B.P. Marsh & Partners: Buy at 150p, target range 170p to 180p; Moss Bros: Buy at 110p, target range 120p to 130p; SeaEnergy: Sell at 15p ('Exploiting a valuation anomaly', 3 Jun 2015)
■ Globo: Buy at 59p, target 69.5p; London & Associated Properties: Buy at 38.5p; Greenko: Hold at 44p ('Catalysts for share price moves', 4 Jun 2015)
■ Burford Capital: Buy at 148p, target 190p ('Legal eagles', 8 Jun 2015)
■ Market strategy ('Financial Market Watch', 9 Jun 2015)
■ Software Radio Technology: Buy at 29.5p, target 40p to 43p; Tristel: Run profits at 92p; Creston: Buy at 136p, target 150p; Sanderson: Buy at 69p, target range 80p to 85p ('Blue sky potential', 10 Jun 2015)
■ 1pm: Buy at 67p, target 80p; Vislink: Buy at 58p, target 70p ('Small-cap growth stocks', 11 Jun 2015)
■ Elegant Hotels: Buy at 105p, target 135p to 140p ('Checking into an elegant investment', 15 Jun 2015)
■ First Property: Run profits at 45p; AB Dynamics: Run profits at 225p and target 250p; Inspired Capital: Sit tight at 20p (Bargain shares updates', 16 Jun 2015)
■ Trakm8: Run profits at 159p, new target 180p; Anite: Sit tight at 126.75p; Trifast: Run profits at 129p, target 140p; Record: Buy at 37p ('Small-cap wonders', 17 Jun 2015)
■ Inland: Run profits at 71p, target 80p; KBC Advanced Technologies: Buy at 110p, target 165p; Caretech: Buy at 237p, target 300p ('Riding an earnings upgrade cycle', 18 Jun 2015)
■ Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 Jun 2015)
■ GLI Finance: Buy at 54p, target 80p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('A triple play of small-cap picks', 23 Jun 2015)
■ Bilby: Run profits at 97p; Safestyle: Run profits at 220p; Epwin: Run profits at 134p ('Soaring small-caps', 24 Jun 2015)
■ Faroe Petroleum: Buy at 86p, target 100p; Greenko: Hold at 65p; Communisis: Buy at 48p ('A slick investment', 25 Jun 2015)
■ Mountview Estates: Buy at 12,250p; Inland: Run profits at 71p, conservative price target ('Running bumper profits', 29 Jun 2015)
■ Redde: Run profits at 138p, target range 150p to 155p; Trakm8: Buy at 175p, target 200p; Cohort: Buy at 312p, target 365p; Burford Capital: Buy at 175p, target 190p; Flowtech Fluidpower: Buy at 135p, target 155p ('Riding earnings upgrade cycles', 7 Jul 2015)
■ Crystal Amber: Buy at 161p; Stanley Gibbons: Buy at 258p; Somero Enterprises: Buy at 150p, target 185p; Globo: Buy at 49p, target 69.5p ('A quartet of small-cap buys', 8 Jul 2015)
■ H&T: Buy at 200p; STM: Buy at 47p, target 60p; Stadium: Buy at 113p, target 140p ('Exploiting upgrades', 9 Jul 2015)
■ Cambria Automobiles: Buy at 57.5p, target 75p ('Driving a re-rating', 13 Jul 2015)
■ Walker Crips: Buy at 47p, target 60p; 600 Group: Buy at 18p, target 24p; Henry Boot: Buy at 235p, target 260p ('A trio of small-cap value plays', 14 Jul 2015)
■ Bilby: Buy at 90p, target 120p; 32Red: Buy at 67.5p, ('Exploiting a valuation anomaly', 20 Jul 2015) target 90p; Marwyn Value Investors: Buy at 244p, target 275p ('Acquisitions drive earnings upgrades', 15 Jul 2015)
■ Vislink: Buy at 53p, target 70p ('Awarding success', 16 Jul 2015)
■ SPARK Ventures: Buy at 4.5p ('Exploiting a valuation anomaly', 20 Jul 2015)
■ W.H. Ireland: Run profits at 120p, target 140p; Safestyle: Run profits at 235p; Charlemagne Capital: Sell at 11p ('Cash rich small-caps', 21 Jul 2015)
■ Amino Technologies: Buy at 150p, target 180p; Arbuthnot Banking: Buy at 1,530p; Globo|: Buy at 49p, target 69.5p ('Primed for major re-ratings', 22 Jul 2015)
■ SPARK Ventures: Buy at 4.5p; Entu: Buy at 115p, target 165p ('Cashed-up for gains', 23 Jul 2015)
■ Capital & Regional: Buy at 60.25p, target 70p ('Hot property', 27 Jul 2015)
■ LMS Capital: Vote against proposals at EGM; Marwyn Value Investors: Buy at 238p, target 275p to 280p ('Game changers, 28 Jul 2015)
■ Stadium Group: Buy at 130p and take up open offer, new target range 155p to 160p; 1pm: Buy at 68p and take up open offer at 60p, new target 90p ('Powered up for gains', 29 Jul 2015)
■ CareTech: Buy at 245p, target 300p; Burford Capital: Buy at 170p, target 190p; K3 Business Technology: Run profits at 275p; Trakm8: Buy at 178p, target 200p ('Hitting the right numbers', 30 Jul 2015)
■ Non-Standard Finance: Buy at 107.5p; Software Radio Technology: Buy at 27.5p, target 40p; Character Group: Run profits at 500p; Communisis: Hold at 50p ('Value judgements', 3 Aug 2015)
■ Fairpoint: Buy at 138p, target 190p; Creston: Run profits at 155p; Sanderson: Buy at 71p, target 80p to 85p; Renew Holdings: Buy at 340p, target 375p ('Break-outs looming', 4 Aug 2015)
■ Globo: Buy at 42.75p, target 69p; Cambria Automobiles: Run profits ('Short sellers in for shock treatment', 5 Aug 2015)
■ Cohort: Run profits at 357p, target 375p; Cineworld: Run profits at 530p; Paragon: Buy at 412p ('Acquisitive growth drives re-ratings', 6 Aug 2015)
■ PROACTIS: Buy at 93p, target 117p ('Procuring growth', 10 Aug 2015)
■ Town Centre Securities: Buy at 310p, target 350p ('Equity market watch', 11 August 2015)
■ Equity market strategy ('Equity market watch', 11 August 2015)
■ KBC Advanced Technologies: Buy at 122p, target 165p; Getech: Buy at 59p, target 80p (‘Fuelled for strong growth’, 12 August 2015)
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
■ KBC Advanced Technologies: Buy at 122p, target 165p; Getech: Buy at 59p, target 80p (‘Fueled for growth’, 12 August 2015)
