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Lamprell's margins perk up

SHARE TIP: Lamprell (LAM)
December 10, 2010

BULL POINTS:

■ New business contracts on the rise

■ Profit margins set to improve

■ Contract backlog more than doubled

■ Well placed in wind-farm industry

■ Improving cash position

BEAR POINTS:

■ Low-margin work to hit 2010 profits

■ Slowdown in rig refurbishment

IC TIP: Buy at 311p

Until they faltered last month, shares in oil services supplier Lamprell had been in recovery mode, albeit from a particularly low base, ever since early 2009 when it became clear that the global economy would not implode under the weight of the credit crunch. But this latest slip-up offers a buying opportunity for patient investors.

Over the past year, the company's shares had been buoyed by a succession of contract wins, which culminated in a $210m (£132.86m) deal to fit and supply a fully equipped offshore drilling platform for Eurasia Drilling Company (EDC). However, this latest contract award was also accompanied by news that Lamprell's bosses expected 2010 profits to be at the lower end of the City's expectations, largely due to the effects of barely-profitable contracts that were accepted at the depths of the recession.

IC TIP RATING
Tip styleGrowth
Risk ratingMedium
TimescaleLong term
What do these mean? Find out in our

The resultant 17 per cent fall in the share price, which generates the buying opportunity, looks especially odd as it's well known that Lamprell does not make profits during the early stages of a contract, so it is unlikely that progress at either of its ongoing Seajacks and Fred Olsens projects will have progressed sufficiently by the end of December to contribute towards 2010 profits. This does mean, however, that 2011's earnings should benefit from an input from both these contracts, which should help to offset the squeeze from the remaining lower-margin work.

LAMPRELL (LAM)
ORD PRICE:311pMARKET VALUE:£623m
TOUCH:309-311p12-MONTH HIGH:394pLOW: 174p
DIVIDEND YIELD:1.2%PE RATIO:23
NET ASSET VALUE:82pNET CASH:$110m

Year to 31 Dec Turnover ($m)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
200633033.816.93.8
200746771.635.817.3
200874185.542.79.6
200942628.414.33.8
2010*45042.021.05.8
% change+6+48+47+53

Normal market size: 15,000

Matched bargain trading

Beta: 1.7

*Evolution Securities estimates £1 = $1.57

The aforementioned deal with Eurasia Drilling Company (EDC) is typical of a number of recent projects initiated by prominent industry names, such as Transocean and Maersk, which clearly point to a shift in emphasis from refurbishing oil rigs to building new ones. This trend is good for Lamprell, helping to give it pricing power for the new-build, rig-fabrication contracts. Gross profit margins at the EDC project, for instance, are expected to run at between 15-17 per cent. That's nothing to get excited about - it's in line with the margins that Lamprell used to generate from refurbishment work when the going was good - but it's a darn sight better than recent refurbishment margins.

In just 13 months, Lamprell has not only doubled the value of its order book, but has also extended the duration of existing contracts from one to two years. This effectively brings assured revenues through to the end of 2012, while boosting the company’s cash position, which, according to broker Evolution Securities, is estimated to rise by 39 per cent in the current year alone.