Getech has now released its interim results for the year ending 2015. It has to be said that detail in this update is rather thin on the ground.
Revenues increased by £509K year on year and cost of sales fell slightly to give a gross profit some £535K higher. We then see an increase in share based charges, depreciation and a negative exchange rate adjustment partially offset by a fall in other admin costs to give an operating profit of £703K, an increase of £485K. A reduction in finance income was more than offset by a fall in tax so that the profit for the half year stood at £691K, an increase of £498K when compared to the same period of 2014.
When compared to the end point of last year, total assets at the half way point of 2015 increased by £2.8M, driven by a £1.5M increase in receivables, a £1.3M growth in cash levels and a £596K increase in the value of intangible assets, partially offset by a £713K fall in current tax assets. Liabilities also increased during the period, mainly due to a £2.5M growth in payables to give a net tangible asset level of £7M, a decline of £310K. It is also disappointing to see that payables are higher than receivables and inventories.
Before movements in working capital, cash profits increased by £546K to £831K before a large increase in payables more than offset an increase in receivables to give an operational cash flow some £1.7M higher at £1.7M. This was further flattered by a tax refund to give a net cash flow from operations of £2.4M. After we account for £482K of development costs and nearly £200K of capital expenditure, the free cash flow is a very healthy £1.8M. The only other major expense was dividends worth £534K to give a cash inflow for the half year of £1.2M.
During the half year the business continued to be affected by the difficult market conditions. The significant drop in oil price has led to cuts in capital expenditure across the full range of exploration and production companies which has led to a negative impact on the service companies, particularly those focuses on exploration. The board believes the market may be difficult for some time so the group is focusing on the key needs of clients and companies that are less affected by spending cuts. They also state that the downturn can lead to opportunities such as better value acquisitions.
The group starts the second half of the year with a substantial pipeline of sales opportunities with discussions underway on major contracts that could have a material impact on earnings. They remain confident of their medium and longer-term prospects. At the current share price the shares are yielding 4% which increases to 4.2% for the full year on WH Ireland’s forecast.
This was a bit of a mixed update for the group. On the one hand, profits were up along with the cash flow and the group is making a decent amount of free cash. On the other hand, net tangible assets are down and in particular the large increase in payables which dwarfed the receivables is a cause for concern in my view. The group won some very encouraging contracts in Q4 last year which has set them up well for this year but the lack of new contracts in the first half is presumably a result of the difficult market conditions. The shares look cheap on a P/E basis and the dividend yield is good but I feel there is just a bit too much risk at the moment and will continue to monitor events.
On the 24th March the group announced the acquisition of ERCL, an upstream oil and gas consultancy. Their skills are primarily in the use and application of seismic and well data in all stages of the workflow and the board believe that the combined group will be able to offer a significantly more comprehensive range of services and products, addressing exploration and development issues across a broader spectrum of client workflows and in particular ERCL brings a proven track record of dealing with Governments and national oil companies. The acquisition comes with more than $1M of specialist oil industry geoscience software under license that is used to analyse technical data on behalf of its clients.
Specifically ERCL provides strategic and advisory services with license round management, capacity building and training, data management and multi-client products. It also provides geo-technical expertise to oil companies for exploration and development projects and to service companies on a proprietary basis. During the last year ERCL delivered revenues of £3.8M and profit before tax of £1.2M but this was flattered by exceptional contributions from work in Africa. The value of net assets is just £40K. It is expected that one of the directors, Huw Edwards, will take up a role on the Getech board after acquisition.
The group will pay a potential total consideration of £4.3M which consists of an initial cash payment of £1.75M, an issue of nearly 2.2M shares which will be given to the current shareholders of ERCL and deferred contingent consideration of £1.55M spread over a three year period. The bulk of this consideration will be paid using Getech’s cash reserves but the group has also arranged a loan with RBS for £1.1M, repayable over four years or less with an interest rate of 2.04% above base rate. Overall then, this seems like a decent acquisition but it is hard to make a real judgement given the fact that ERCL profit seems to have been pumped up by a one-off Africa contract.
On the 13th April the group announced a new national oil company contract. The contract is for three years with the client having the option to extend for a further two years. Getech is one of three companies contracted to provide basin evaluation services and it is anticipated that the client will offer by way of tender to these three companies several basin evaluation packages per year and that the value of these packages will, if won by Getech, significantly affect the company’s results. This is good news but it is slightly tempered by the fact that the group will have to bid for work still and nothing concrete has been won yet. Still, there is exciting potential here.
On the 17th June the group announced that the wife of director Peter Stephens purchased 50,000 shares worth just over £25K. This is a decent vote of confidence that brings his shareholding to over one million, representing over 3% of the total issued share capital.
As we can see, the share price has come of the boil a bit in recent months.
On the 7th August the group released a statement covering trading for the full year of 2015. The board are expecting profits before tax to double to £2M which would be a result slightly below current market expectations.
Three major NOC contracts were announced during the year and longer term contracts include the commitments to Globe as well as the multi-satellite project which have substantially reduced the impact of the movements in the price of oil. Despite the three NOC contract wins, only one, the Sonangol contract, contributed income during the year and the group expect all three clients to generate significant income in the coming year. The ERCL acquisition is integrating well and has made a positive contribution to profits but is experiencing an impact from the market downturn.
Overall, the directors believe that the market conditions in the year ahead will remain challenging but, based on the existing contracts and continued client interest, they remain optimistic for the future and confident about prospects for 2016 as a number of significant discussions have already taken place with clients regarding including the group’s products in their 2016 budgets. This will supplement the income already committed to the Globe and Multi-Satellite projects as well as the anticipated returns from the NOC clients.
Overall, despite the slight undercut of expected profits, the outlook statements looks very positive and the contribution from the NOC contracts should help weather the storm of the lower oil prices. I am tempted to add here despite the terrible market conditions.
On the 12th August the group announced that CEO Raymond Wolfson sold 17,500 shares at a value of just under £10K. He still owns 452,979 shares in the company representing nearly 1.4% of the total. Apparently the sale is in order to settle the remainder of his income tax bill following the exercise of options earlier in the month. It is always a shame to see the directors selling shares but given the quantity involved, I buy the explanation given and don’t see this is an issue. I decided to take an initial position here.