I've bought more Lamprell after today's results

Disclosure: I own shares of Lamprell.

After halving my holding in rig-builder Lamprell last December, I’ve hung on to the remainder — despite watching the shares fall by a further 40% or so.

My thinking has been fairly simple: Lamprell’s net cash and backlog of late-stage projects have meant that the firm should continue to generate cash next year, even without much new work coming in.

When the market does start to turn and new projects are awarded, Lamprell should be able to ramp up from a strong base — in terms of both financing and recently-upgraded facilities.

The risk, of course, is that the market slump will continue longer than expected, eroding the firm’s net cash and strong balance sheet.

I decided to wait until Lamprell’s interim results were published today before making a decision on whether buy more. I was also prepared to sell, if the figures were not what I expected.

Having read through the firm’s interim results this morning, I’ve added to my holding at 58.7p per share.

Deep value?

The biggest factor behind my purchase is Lamprell’s balance sheet. Here’s how things stand (as of 30 June 2016):

• Current assets: $651.7m
• Current liabilities: $240.0m
• Net current asset value (NCAV): $411.7m / c.£314m or 92p per share
• Market cap: £203m

Lamprell appears to be trading at a 35% discount to its NCAV. A substantial slice of this is net cash of $151m. However, a substantial part of the group’s appeal is its $412m of trade and receivables.

What this implies is that the market is valuing the firm’s ongoing business and fixed assets at zero. I think that’s overly pessimistic, given Lamprell’s strong net cash position and recently-upgraded dockyard facilities.

My thinking has been that while new work may be thin on the ground for a little longer, Lamprell’s yards are currently full of major projects due for completion over the next 6-12 months. As these complete, the firm’s receivables should gradually be converted to cash.

On Lamprell’s investor call this morning, CFO Tony Wright confirmed this view. As all major projects are at a fairly late stage, the group has no customer cash on its balance sheet (i.e. advance payments) and expects net cash to rise as receivables start to fall.

I’ve defined NCAV as current assets minus current liabilities. But even if we use the more demanding Ben Graham measure of current assets minus total liabilities, Lamprell still has a NCAV of $321m, or about £244m (71p per share).

The current £203m market cap equates to a 20% discount to Ben Graham’s fairly demanding measure of net current asset value.

…or cheap for a reason?

It’s worth repeating that one reason for the shares’ discounted value may be that the market expects Lamprell’s cash to be consumed by the business of surviving the current downturn.

The group certainly does have relatively high fixed costs. SG&A costs totalled about $26m during H1, so are likely to be more than $50m for the full year.

A second concern is that the recent problems with the Cameron jacking equipment on the Ensco 140 rig have reduced Lamprell’s full-year profit by $35m. I suspect that the company will recover this money and other incremental costs incurred on similar projects from Cameron. But it may be a long and slow process, and could involve costly legal action.

In the meantime, revenue forecasts for 2017 have been cut to $400-500m and the firm’s bid pipeline has shrunk from $5.3bn last year to just $3.9bn. Lamprell has very little work lined up when current projects complete, and may even end up losing money in 2017.

Oil market outlook

The final element in my decision is that I believe the oil market is reaching a low point, and that a material level of rebalancing is likely in 2017. I don’t expect oil to trade anywhere near $100, but I don’t think it will need to in order to trigger some increase in activity levels.

Oil at $55-60 will be enough — in my opinion — to start bringing the market back to life. Costs have fallen dramatically over the last two years and investment in new fields has all but dried up. This situation won’t remain static forever.

I’ve bought more

As things stand, I reckon Lamprell shares are worth about 80p — their NCAV minus a 10% discount. But if the firm can start refilling its order books, then significant further upside should be possible.

Disclaimer: This article is provided for information only and is not intended as investment advice. Do your own research or seek qualified professional advice before making any trading decisions.