Thursday, December 20, 2012

Lamprell Plc - Jack-up Rigs




The Arabian Gulf is a low cost source of oil and gas production and the UAE is the hub for support services for the gulf region’s oil industry. 

And, in the UAE (and the region generally), Lamprell is the leading refurbisher and manufacturer of jack-up rigs and Floating Production Storage Offloading (FPSO) structures. 

Which is significant because the UAE is characterized by limited industrial refurbishment and fabrication facilities, and especially limited in facilities with quayside access. Why? Because the physical space for them is limited: a natural barrier to entry. (In this sense, the case for Lamprell echoes the case for Hawaiian Holdings).

In 2010, there were four competitors in this naturally protected market: Lamprell was the largest and the others were Dubai Drydocks, Gulf Piping Co., and Maritime Industrial Services. Lamprell acquired MIS in 2011, and now there are three.

Natural barriers to entry and consolidation should mean above-normal returns on capital. And it turns out that Lamprell returns 33% on its operating capital. It’s a good business.

Note: USD

Lamprell has a newish sideline in manufacturing vessels used in installing offshore wind turbines. It won a 320m contract to supply two such vessels to Fred Olsen, the Norwegian 
shipping firm. One of these ships has been delivered and the other will be, soon. 

Lamprell’s present share price problem is that this project wasn’t executed well: it was a fixed-price contract, there were cost overruns and supplier problems, and there will be late delivery penalties. The total cost of this snafu is in the neighborhood of $175 million (GBP 108 million).

One would expect, therefore, that this amount (41p per share) would have been knocked off Lamprell’s enterprise value.  The market has, spurred on by analyst downgrades and a suspension of the interim dividend, instead wiped 6x this amount from Lamprell’s implied value. 

The result has been to price Lamprell in such a way as to say that either (a) it no longer has a competitive advantage in its traditional oil and gas rig markets or (b) the banks will refuse to renegotiate its loan covenants and will pull it into bankruptcy. 

Both these arguments are absurd; the former implication is plainly wrong and the latter scenario is highly unlikely to come about: Lamprell’s order book stands at 1.5 billion; it is the rare company that finds itself in a leading, competitive position in an industry that will experience steady real growth for decades to come.

Lamprell traditionally converts 10% of revenue into earnings and easily earns 30p per share. The shares are worth more than 300p. My sense is that they will re-price in fits over the next twelve months -- which is why I included them in my UK picks for 2013.

Disclosure: No position

15 comments:

  1. Do you know how much future work is related to offshore wind? Economics of this are rather worse than previously thought - the turbines become uneconomic after 15 years or so rather than 25.

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  2. From slide 11 of Lamprell's interim presentation, one gets the impression that wind turbines are an immaterial share of future business.

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  3. http://www.investegate.co.uk/lamprell-plc/rns/replacement--banking-waivers-and-contracts-update/201301020913326367U/

    Covenants have been waived, as expected.

    What remains is (a) the windcarrier 2 to be delivered in February; and (b) the market to come to terms with the fact that Lamprell is a rig manufacturing/refurbishment business, not a shipbuilder.

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  4. Lamprell certainly seems to have advantages in the rig refurbishment business, but is there enough of that work to keep all of its new capacity occupied? Or will the company's ROIC inevitably decline as it fills its new capacity with lower margin work? The order book and pipeline are heavily weighted to new builds. Do you have a clear sense of the company's margins in this business?

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    Replies
    1. On the evidence of pre-2007 results, the refurbishment business is worth 475m to 500m on an enterprise basis. You can see that from 2007 on, when new builds accounted for meaningful and increasing share of revenue, ROIC did not deteriorate even though new build work is fixed price -- in fact ROIC trended up.

      The reason, I think, is that new build work comes with substantial down payments whereas refurbishment work doesn't. The steep decline in working capital days from 2007 is evidence of this.

      The second question, about volume, is harder to answer definitively. I'd say only that the order book seems as strong as ever.

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  5. Great find, i will look deeper on this one.
    two questions:
    Any valuation about the intrinsic value ?

    and why, if you its o.k to ask, you gave it such a big portion in your UK portfolio but nothing in your real one?

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  6. Hi,
    I was buying as were asking the question. inrinsic value is likely above 300p & I'll be disappointed if it doesn't get to 220p over the course of the year.

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  7. Great thanks.
    What's your take on buying the Lamprell on the OTC market (LMPRF)?

    It would be a lot cheaper to buy it in the U.S but i'm not sure if it is the same as buying the U.K one?

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  8. Well the market cap in sterling is 349m which is $575 in USD which in turn works out to about $2.21 per share, so I'm not sure that LMPRF is trading at a discount.

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  9. Looks interesting, I think I wlll buy some. Some questions:

    - how much of the net cash (150 mn $ recently) do you see as excess cash? What are the (historic) reasons for this cash position. Oil contracting/services are cyclical - is it a reason to hold a lot of cash?
    - a bit confused about EPS: from a quick analysis I think 30c pa is reasonable, you seem to say 30p? What am I missing?
    EPS cents 2007-2011 (incl. exceptionals): 35.7 42.6 14.2 30.04 26.5
    - short/medium term: the order book isn't increasing. any thoughts on this? and on impact on share performance?

    Thanks & thanks for the great blog, it is a great investing source for me.

    Pj.

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  10. PJ,

    I meant 30c not 30p.

    I suspect that a business like Lamprell needs working cash equal to 2 or 3 percent of revenue.

    I suspect that if you strip out the foray into (and reversal out of) offshore wind, the order book will show growth over the past few years.

    Thanks for reading.

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  11. Best wishes for 2014.

    So a really back ot envolope calculation would be:

    260 mn shares
    100 mn $ excess cash = 38c/share
    30 c EPS per share, assume PE of 12 = 360

    so correct value per share around 400 usd cents = 240p?

    Of course the question is what is the correct PE. I don't have a clear view yet on:
    - expected sales growth?
    - investments required? (I get the impression they've invested in a quite a lot of expansion of sites already)
    - margins?

    my feeling (tbc) at the moment it's a medium growth company, with a good moat. maybe a PE of 15 or more makes sense (also given today's low int env)?

    PJ

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  12. That's how I see it. 220 to 240 at the lowest end of the value range and 300p to 400p as the fair value range.

    Happy New Year

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  13. Lamprell operates in an industry that's hated right now, but does that justify trading at 1x or 2x ex-cash earnings? Are you interested at 80p/share, or are the Asian bargains still better?

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    Replies
    1. The last time that I bought it (2012 I think) was at 78p so I like it at 80p well enough. They say they're mostly booked for 2016 and mid-east shallow water drilling should survive most reasonable (and sustainable) crude scenarios. I'm happy enough, though, with my O&G exposure as it is.

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