That’s not to say that the entry price will prove to be the most opportune in hindsight. It rarely ever is. But assuming you factor in a ‘margin of safety’ into the price you are willing to pay, and are prepared to wait until other investors recognise the value you have spotted, then more often than not on average Mr Market will reward you handsomely. This also explains why I see a ‘stock market sale’ during a market correction as the ideal time to buy as investor risk aversion can be overly high and company valuations can be artificially depressed due to the higher than average risk premium embedded in prices.
This subject is of relevance to me right now because having identified Aim-traded Thalassa (THAL: 195p) as a company worth following 15 months ago when the price was 138p (‘Potential for seismic gains’, 19 March 2013), the shares subsequently soared by 125 per cent to an all-time high earlier this year. During that upmove the company raised £22.6m through an institutional placing of shares at 250p last October, and 120p at this stage last year, to provide the working capital to service a record order book.
The new funds have enabled Thalassa to carry out a $10m (£5.9m) capital expenditure programme to refurbish two compressors acquired, upgrade some of its existing systems, and build a mini-PMSS™ system in advance of undertaking work in the high resolution 3D sector. To recap, Thalassa provides 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.
Highly profitable niche
It is proving a highly profitable niche to be operating in as Thalassa’s revenues more than doubled to $30.6m (£18m) last year, and with the benefit of a hike in margins, operating profits surged from $1.5m to $4.2m, bang in line with upgraded analyst estimates.
That was in part down to a contract worth $85m (£50m) over a nine-year period with Norwegian energy giant Statoil ASA (STL:NYQ). As part of the agreement Thalassa is providing long-term seismic acquisition services for permanent reservoir monitoring of the Snorre and Grane oil fields in the Norwegian sector of the North Sea. Importantly, in a trading update last week, the company confirmed that it has completed mobilisation for the first 2014 permanent reservoir monitoring survey over the Snore field. The survey will be concluded by the end of this month and a second one is scheduled to start at the beginning of October. In the meantime, the first survey of the Grane field is due to start in early September. Given the size of this contract, then this is clearly encouraging news.
It is also very encouraging to hear that Thalassa completed an order earlier this month to perform a survey in the North Sea. One of the Group's PMSS™ units was mobilised on an operated field platform survey vessel that was converted into a seismic source vessel for the duration of the survey. However, it seems to have been missed by the market that Thalassa’s chairman and major shareholder Duncan Soukup has gone on record to say that "the service order will make a meaningful contribution to the growth which the board anticipates Thalassa will achieve this year".
That’s important because analyst John Cummins at brokerage W.H. Ireland is forecasting that Thalassa’s revenues will rise by 20 per cent to $36.5m in 2014 to produce pre-tax profits of $5m and EPS of 16.9¢. The respective forecasts for 2015 are turnover of $41.6m, pre-tax profits of $6.1m and EPS of 20.7¢. The EPS figures have been adjusted to reflect the greater number of shares in issue post the share placings.
It also seems lost on investors that Thalassa has won a further $4m (£2.35m) contract with Nasdaq-quoted SAExploration (SAEX: NMQ) to provide shallow water source handling and deployment services for seismic acquisition projects in the North Prudhoe Bay, Alaska. Thalassa will assist SAExploration in developing a shallow water source handling and deployment system with the aim of boosting productivity during the summer weather window. Furthermore, the bid pipeline remains strong at a record $142m so there is substantial business to potentially convert into more orders.
Earnings estimates underpinned
True, some investors may have been hoping for more news on the bid pipeline by this stage of the year given we are almost half way through 2014. But equally it’s less important than you may think because WH Ireland has only factored in that a quarter of the tender pipeline will be converted into firm contracts this year and next. And with the three contracts above all in the bag, then Thalassa’s half-year results should make for pleasant reading when the company reports in six weeks time. In fact, at this stage last year Thalassa reported pre-tax profits of $1.39m on revenues of $11.6m, so we can expect a substantial rise on both of these key metrics in the interim results announcement.
Moreover, it also seems lost on investors that Thalassa’s cash pile ended last year at $32.2m (£19m) and, even after factoring in capital spending plans, is expected to end this year at around $28.5m, or 66p a share. Strip out cash from the current share price, adjust for interest income and Thalassa shares are only priced on 13 times current year cash adjusted earnings estimates. So on the basis the company has not changed its guidance, and has been issuing positive trading updates on work that underpins earnings estimates, I feel the slide in the share price is harsh to say the least. I also feel that my target price of 350p is not unrealistic. Offering potentially 75 per cent upside, Thalassa share price not only offers a decent ‘margin of safety’, but in 12 month's time could have proved to be a bargain buy.
Please note that I will be on holiday for the week of Monday 23 June.
■ Simon Thompson's new 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 £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
