We'd like to reiterate the investment case for shares in Lamprell, a specialist engineering and drilling rig manufacturer that provides services to the off-shore oil industry in the Arabian Gulf. Lamprell's shares went on our 'buy' list in December 2010, but last July it acquired Dubai-based Maritime Industrial Services (MIS) for £205m – a deal that Lamprell's bosses label "transformational". Certainly, MIS will expand Lamprell's product offering, enhancing its in-house engineering capabilities, while enlarging the capacity of its manufacturing facilities by 68 per cent; the deal will also help to broaden Lamprell's geographic footprint.
- Transforming potential of MIS deal
- Record order backlog
- Strong balance sheet
- Improving rig refurbishment market
- Possible global slowdown
- The 'Iran' factor
Lamprell's operations have centered on the United Arab Emirates, but the MIS acquisition has already enabled the company to establish a presence in the Gulf of Mexico. In December, it took over an existing MIS contract with PEMSA – a drilling subsidiary of Grupo Mexico – to build one of Lamprell's Hull 108 drilling rigs.
Lamprell's results for 2011 only partially reflect the integration of the MIS business, with revenues up by 130 per cent to $1.15bn (£0.72bn). More prosaically, operating profits were only up by 17 per cent to $79.6m, after $10.5m of one-off charges relating to the MIS acquisition. In addition, profit margins were squeezed when a contract overran for a lift-boat, an offshore drill-rig with retractable legs.
Ultimately, the MIS deal will provide significant operational benefits, including estimated annual cost synergies of $11m. The proceeds of the PEMSA contract, estimated at around $130m, will be used to pay down a portion of Lamprell's debt for the acquisition. Chief executive Nigel McCue is confident that owning MIS will substantially add to the company's earnings even in the first full year, although it may take some time before the full synergies feed through into profits.
| LAMPRELL (LAM) | ||||
|---|---|---|---|---|
| ORD PRICE: | 340p | MARKET VALUE: | £885m | |
| TOUCH: | 339-340p | 12-MONTH HIGH: | 400p | LOW: 216p |
| DIVIDEND YIELD: | 2.8% | PE RATIO: | 10 | |
| NET ASSET VALUE: | 129p | NET DEBT: | 19% | |
| Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2009 | 0.43 | 28 | 13.2 | 3.5 |
| 2010 | 0.50 | 65 | 30.2 | 12.3 |
| 2011 | 1.15 | 64 | 26.6 | 11.7 |
| 2012* | 1.15 | 121 | 46.4 | 14.5 |
| 2013* | 1.29 | 144 | 55.3 | 15.0 |
| % change | +12 | +19 | +19 | +3 |
Normal market size: 4,000 Matched bargain trading Beta: 1.7 *Investec Securities forecasts £1=$1.59. 2011 Final year dividend: Pay-date 22 Jun Ex-date 23 May | ||||
Lamprell's year-end order backlog stood at a record $1.22bn, representing a 40:60 split between new and repeat customers, but the company had also built up a bid pipeline worth $5.2bn by the end of February. Three-quarters of the order backlog relates to new-build marine projects, but Lamprell also reports renewed demand for refurbishing oil rigs in the early part of this year after a fall away during the second half of 2011.
Lamprell's new-build segment has benefited from the investment incentive provided by high prices for crude oil, but the increasing influence of so-called national oil companies (NOCs) shouldn't be overlooked. This was demonstrated in October when Abu Dhabi's National Drilling Company exercised an option for the construction of two of Lamprell's LeTourneau Super 116E Class jack-up rigs for $333m.
True, demand for Lamprell's services could dip if high oil prices mean that economic recovery stalls, although capital spending by NOCs is not too sensitive to the price of crude oil. Then there is the worst-case scenario involving a trade embargo that prompts Iran to try to close the Arabian Gulf.
Since our original tip, Lamprell's share price peaked at 395p in July 2011, before falling back sharply on news of cost overruns on two fixed-price lift-boat contracts. Nevertheless, Lamprell's shares currently trade 9 per cent up on that tip (311p, 10 Dec), and readers who followed our advice would also have pocketed 17.5p per share in dividends.
