Lamprell, an oil and gas contractor in the Arabian Gulf, is a classic recovery play. Its share price is down 60% since May, yet its industry is in good shape. As long as the firm can stop shooting itself in the foot, there's every chance of a rebound.
The company builds and refurbishes oil and gas rigs, as well as building liftboats that install offshore wind turbines. But its second-generation liftboat has been plagued by gremlins. It lost $46m on designing two such vessels for Norwegian shipping giant Fred Olsen.
Lamprell has also had supply-chain woes affecting key components for its rigs. The group will now report a loss this year of $12m-$17m on turnover of $1.1bn. Worse still, bank covenants have been breached. These must be renegotiated by the end of December. That's a lot of bad news in the space of just four months.
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Yet it's not in as much trouble as the share price suggests. High crude prices are boosting demand for new rigs. Those already in the field need to be upgraded for harsher environments, such as deep-sea drilling. Customers also face greater regulatory constraints (following the Deepwater Horizon oil spill in the Gulf of Mexico), which have prompted operators to take extra safety measures.
So with the buoyant backdrop, Lamprell's immediate concern is to fix its internal problems, and move on which it seems to be doing. Jonathan Silver is to step down as chairman in favour of John Kennedy, an industry veteran with a more hands-on approach. The group has also maintained its $1.47bn order book and $4.4bn pipeline, overhauled management at the divisional level, and improved its overall processes, systems and controls.
Lamprell (LSE: LAM), rated a BUY by Liberum Capital
Chief executive Nigel McCue continues to see strong demand in the oil rig market, and is confident of being able to amend the banking agreements before year-end. With net debt at the end of June at $36m a comfortable 8% gearing ratio I don't believe there should be any significant solvency or liquidity problems.
The City expects turnover and underlying earnings per share (EPS) of $1.2bn and 20 cents respectively. I rate the stock on an eight times earnings before interest, tax and amortisation (EBITA)multiple. Assuming through-cycle profit margins of 7.5%, and adjusting for debt, gives an estimated worth of 160p a share.
In all, Lamprell is in an attractive industry, and should be making hay while the sun shines. Liberum Capital has a target of 176p. An update is out on 31 October.
Rating: HIGHER-RISK BUY at 116p
Paul also writes the Precision Guided Investments newsletter. See moneyweek.com/PGI, or call 020-7633 3634.
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