I am still making my way through all the announcements and in today's column I am updating the investment case on a small-cap company that just released an absolutely storming set of financial results.
Prospects for seismic profit growth
It is fair to say that investors reacted positively to half-year results from Aim-traded Thalassa Holdings (THAL: 168p), a company that provides the energy industry with marine seismic equipment and, in particular, a technology called Portable Modular Source System (PMSS™). This equipment is installed on vessels to provide a seismic source to enable oil and gas exploration and production companies to perform life-of-field seismic studies or permanent reservoir monitoring.
The positive reaction was hardly surprising either, after Thalassa revealed that revenues almost trebled to $11.6m (£7.6m) in the first six months of this year and that operating profit almost quadrupled to $1.3m. This reflects a raft of contract wins. For instance, a contract with SMG Ecuador, the Ecuador business of State Sevmorgeo Company, the Russian geological sea survey company, earned the company $6.7m (£4.4m), or almost half of Thalassa's revenues in 2012, in the first half alone. A second phase of that contract, relating to surveys that are planned to commence in October and continue until April, is worth between $4m and $5.4m. The future pipeline of work is very promising, too - based on order enquiries and tenders submitted to date, Thalassa has in excess of $100m of work in the bid pipeline for delivery in 2014-15.
Included in the order book is a major contract with Statoil ASA (NO: STL), potentially worth $65m over eight years, to provide seismic acquisition services for reservoir monitoring of the Snorre and Grane oilfields in the Norwegian sector of the North Sea. Statoil is also purchasing a bespoke dual portable modular source system (D-PMSS™), which Thalassa will maintain and operate throughout the duration of the contract. The proposed value of this contract is $19.8m (£13.2m) and delivery of the system is expected this October.
It is also reasonable to expect further contract wins. As executive chairman and former banker Duncan Soukup points out, his company is finally reaping the benefit of its early recognition of a previously untapped growth area in the marine geophysical market. Admittedly, recognition, even from within the industry, of the benefits of "production enhancement" techniques has been incredibly slow before this year. However, this is now "changing rapidly" according to Mr Soukup. Indeed, industry experts estimate that the market has the potential to grow to $20bn over the next 30 years.
It's therefore reassuring to note that Thalassa had net cash of $16.8m (£11m) at the end of June, which provides the working capital needed to service an increasing number of contracts. True, there is execution risk as the young management team has to prove that it can step up to the task of servicing these contracts. That said, progress to date has been very promising.
Upside to forecasts
Post the results, and having already upgraded estimates significantly this year following the aforementioned contract wins, oil analyst John Cummins at brokerage WH Ireland is maintaining his full-year revenue estimate at $30.6m, up from $14m in 2012. If achieved, this would drive pre-tax profits up from $1.2m to $2.7m. On this basis, and factoring in the extra shares in issue following a placing of 4.5m shares at 120p in April, adjusted EPS rises from 10c to 15.2c (10p).
It's worth noting though that WH Ireland have been very conservative with their forecasts as they are purely based on contracted revenue to date, so the risk to estimates is to the upside if the company wins more contracts as it has clearly been doing. The brokerage currently forecasts pre-tax profit of $3m in 2014, but it's my firm opinion that an earnings beat is increasingly likely, in the absence of more upgrades, given the momentum in the business and the scope for more contract wins. Mr Cummins agrees and "sees scope for estimates to be raised in due course", noting that the board's outlook statement points "to a period of significant growth".
But even without earnings upgrades the shares are way too cheap. That's because that low-yielding cash pile alone is worth 67p a share, the equivalent of 40 per cent of Thalassa's current share price. Strip net funds out and the shares are trading on a modest 10 times earnings estimates of 10p. For a company nailed on to increase profits by at least 125 per cent this year, and potentially more if more contracts are won, that is hardly an exacting valuation. Moreover, the risk to earnings is firmly on the upside.
Target prices
As regular readers of my columns will be aware, I previously advised buying Thalassa shares at 135p ('Potential for seismic gains', 19 March 2013) and reiterated the advice at the start of May when I noted that Mr Soukup had been on a massive buying spree when the price was 141p ('Small-cap stock picks, 1 May 2013). If anything, the investment case is even stronger now.
Importantly, following a period of share price consolidation, it appears that the next leg of the up-move has now started following the release of that bumper set of first-half results. True, a low free float means the small-cap shares are volatile, so an investment in Thalassa's shares will not appeal to everyone. That said, after factoring this risk in, I still believe that the shares remain very undervalued.
Trading on a bid-offer spread of 162p to 168p, and offering 20 per cent upside to my conservative 200p target price - equating to a 2013 forward PE ratio of 13 net of cash - the shares rate a strong buy.
Finally, I have updated the investment case on 16 small-cap shares in seven other online articles this week: Small-cap wonders; Deep value plays; Small-cap trading buys; Undervalued and Unloved; Running profits; Capitalising on capital returns. and Indigovision shares slump on warning. I will update the investment case on Inland (INL: 32p), WH Ireland (WHI: 59p) and Communisis (CMS: 67p) as soon as I have completed my research.
