So, when KBC Advanced Technologies (KBC:69p), a consultancy and software provider to the global hydrocarbon processing industry, announced a major contract at the end of last year with EP Petroecuador (EPP), the integrated state national oil company of Ecuador, I certainly took note. KBC is working with EPP, both directly and through a major subcontractor, to improve its core work processes and support systems, as well as develop the technical capability of the workforce.
The contract is worth $100m (£66m) over a period of four years, a significant sum given KBC generated annual revenues of £63m last year.
Not surprisingly, the contract underpins a large amount of the company's forecast revenues both this year and next. It also means that there is scope for earnings upgrades if KBC is able to win enough new contracts from other companies. And this is exactly what appears to be happening as KBC has just announced a $16m, seven-year contract for the provision of Multiflash™ software, maintenance and support services to a large oil and gas services company.
The contract is an extension to a previous royalty agreement between the client and Infochem, a company that KBC acquired in June 2012, and will enable the integration of Multiflash within all of the client's production software applications which are used by the majority of oil and gas companies worldwide.
Strong profit growth in 2013
Before the EPP contract was announced analysts at broker Cenkos Securities were forecasting KBC would make pre-tax profits of £7m on flat revenues of £63.9m this year. This is a sharp rise on the £5.5m of profits made in 2012, a year that was dogged by a painful profit slide; working capital pressures that forced KBC to raise £1.3m from institutional investors and axe the dividend; delays in the renewal of a Latin American contract which held back revenues at the company's high-margin software business; and a restructuring programme that led to staff cuts. The restructuring aims to save KBC around £900,000 a year, which accounts for almost two-thirds of the profit increase expected this year.
However, those problems are all history now. When KBC announced its full-year results in March, the company had a record level of contract awards and boasted an order backlog of £82.9m at the year-end, up from £48.7m a year earlier. And this order intake has clearly continued into 2013.
Ahead of a full trading update from KBC later this month, broker Cenkos is maintaining its full-year estimates. Currently, analysts are looking for 2013 pre-tax profits of £7m and EPS of 7.3p on revenues of £63.9m, rising to £8m and 8.3p, respectively, on turnover of £67.1m in 2014. But, given the newsflow to date, it is only reasonable to expect a positive trading update in a few weeks time and one potentially with scope to prompt upgrades from Cenkos. KBC has its annual meeting on Thursday 23 May. There should also be positive news on the dividend which Cenkos believes will be reinstated this year. The forecast is for a 1.6p a share payout.
KBC can certainly afford it as the company ended last year with net cash of £13.3m, or a third of its market value. That's the equivalent of 22.5p a share. Strip that out from the current share price of 69p, and in effect KBC shares are being priced on six times earnings estimates net of cash. The company's market value of £40m is also a modest 30 per cent premium to book value.
Share price break-out
I have been biding my time waiting for the sideways move in KBC's shares to run its course following the bullish upmove following the EPP contract win. Since the start of the year, the company's share price has traded in the narrow range between 60p and 69p, but following the latest contract win it moved right up to the top of the range. In my view an imminent break-out beckons.
If I am right then expect a sharp move to around 80p in quick order, a prior resistance level from last summer, before an assault on the 91p high from February last year.
Needless to say, the combination of a share price break-out, potential for earnings upgrades, contract wins, a reinstated dividend, and strong profit growth this year and next, makes KBC a compelling investment opportunity. I rate the shares a strong buy on a bid-offer spread of 68p to 69p and have a three-month target price of 90p.
MORE FROM SIMON THOMPSON ONLINE...
My next column will appear online by 12pm on Tuesday, 7 May. I have written six other articles in the past week, all of which are on my homepage and include the following companies or sector trades:
Housebuilders ('Seasonal stock picking strategies', 30 Apr 2013)
Daejan Holdings, Mountview Estates ('Hot property', 1 May 2013)
Aurora Russia, Thalassa ('Small-cap stock picks', 1 May 2013)
Town Centre Securities, Terrace Hill ('Hot property: take two', 2 May 2013)
Netplay TV ('A golden nugget', 2 May 2013)
Polo Resources, Heritage Oil, IQE ('Bargain shares update', 3 May 2013)
