High-risk potential turnaround in Gulf Marine Services

Day trader Michael Taylor looks at a debt-laden business with speculative upside

February 2, 2022

It’s not often these days that the FTSE 100 outperforms the US market. But outperformed it has – powering within 5 per cent of its all-time highs. The Dow Jones Industrial Average and the S&P 500 suffered in January and are well off their highs and recently traded below key support levels. But this week both the US indices reclaimed their spots above their 200-day exponential moving averages, so bulls can breathe a sigh of relief. For now. It’s long been said that the US is overvalued and UK stocks are undervalued. But is that such a bad thing?

New research from Schroders shows that despite the market’s infatuation with US stocks you’re statistically more likely to find a 10-bagger stock (a phrase coined by Peter Lynch – legendary fund manager who ran the Magellan Fund at Fidelity) in the UK.

10-baggers are the private investor's dream. But they are not so impossible to find. I’ve bought and sold many stocks that, if I’d held onto them, would have gone on to be 10-baggers at least. This is the hard part: holding onto them. Everyone likes the idea of a 10-bagger; the reality is that to earn yourself a spot in the 10-bagger club you often have to hold on through stomach-churning volatility.

When a share price rises several times over, the stock takes up an increasingly large proportion of your portfolio. If that stock makes up the majority of your account, then your account’s performance is held to ransom by just one stock. Finding 10-baggers is easy. Holding on until they become 10-baggers is the hard part.

It’s also not uncommon for stocks to halve in the space of just a few years either! But effective stock screening and understanding what you’re doing in the market can minimise the hits you take. As I’ve often said, any stock can go to 0p at any time, and this is simply a hazard of doing business in the stock market. You can protect yourself through position sizing and also by weeding out the garbage before you buy it.

One thing I like to look for is director alignment. Of course, directors can never truly be aligned to shareholders, because directors have advantages that the company’s shareholders will never have. For example, a director doesn’t even need to buy stock and have skin in the game to profit. Management can issue themselves nil-cost options, which, in my opinion, is just handing shareholder money over to management’s wallet. If an option can be exercised at 0p, then any price above this is pure profit when sold. Management will say they’re incentivised, but they’re already in the money. Options that have a strike price above the share price, or at least at the same level as the share price, make a much better argument for management being incentivised. But when a director buys stock from his own pocket, there’s only one reason they do so: they think they will make money. People have all sorts of wonderful and weird reasons why they sell, but nobody ever forces someone to buy.

One stock I have taken a position in recently is Gulf Marine Services (GMS). This is a high-risk stock, and not for those who are risk-averse. There is a chance that this situation could go badly wrong, and if it does then the company will be wiped out. However, I believe that risk is priced in massively, compared with relatively little of the upside. I was offered the company's placing at 3p but turned this down. I didn’t do the work here as deals were coming through thick and fast, but I’ve since taken a position that is not far off nearly double the placing price.

Looking at Chart 1, we can see that the stock was in a stage four downtrend for the past five years. I’ve marked an arrow on the chart where we can see a huge volume spike and a gap down due to the refinancing of the company with the placing at 3p.

Moving on to Chart 2, we can see in detail the price action of the stock since the placing. During this time, the executive chair, Mansour Al Alami, has bought stock several times, most recently at a price of 6p. The company saw a board overhaul and in May 2021 Al Alami was appointed to the top job.

The company operates self-propelled and self-elevating support vessels (SESVs). These SESVs provide services to the oil and gas industry as well as renewables – but it’s the former where the opportunity lies. Gulf Marine Services hires these vessels out and many of its clients are national oil companies in the Gulf. Utilisation rates have been steadily increasing, and if these rates hit 100 per cent then companies will need to outbid each other in order to secure vessels. Panmure has a 2022 Ebitda forecast of $75mn and profit after tax is forecast to be $34.1mn. That puts the company on a PE ratio of just above two – but we can’t forget that the debt here is astronomical. Bank borrowings stood at $368.5mn as of the company’s half-year report. The company is required to raise another $50mn in equity as a current condition from its bank consortium and there is also the right to take up warrants at 6p (currently above the stock price but which could represent significant dilution).

But if the business is able to demonstrate strong cash generation, management may be able to redress these terms for the better. That said, there are no guarantees. I am long this stock, and intend to increase my position if the price breaks out at 6.5p, but anyone trading this stock needs to be fully aware of the risks. It’s not one for the faint-hearted.