Lamprell’s share price has collapsed 80% then recovered 20% in a month.Â
The company’s spectacular share price fall on 16 May was followed by criticism in the financial press over its disclosures and the sale of shares by two senior employees shortly before a profit warning wiped two-thirds from the company’s stock valuation.
Jen Zimmerman, an analyst at ABN AMRO Private Banking, gives his take on the latest developments affecting the company, and the company’s recovery prospects.
After we had given a positive business and investment outlook for Lamprell in Oil & Gas Middle East’s April 2012 ‘Profit Oil’ section, the company reported two surprising profit warnings within a month due to supply chain delays for critical components in its newbuild rig business, which will trigger a postponement of revenue and profit recognition on Lamprell’s part.
As a result, the company lowered its 2012 profit margin guidance twice, first to 3.5% and now to 2.5% on expected revenues of about $1.1 billion, and now projects a net loss of $15-20million in H1 2012.
In addition, management did not revise its earlier 2013 guidance with a net margin target of 7.5-8.0% on revenues similar to 2012.
After the company had already problems with executing lump-sum contracts in its newbuild business for windfarm liftboats in October 2011, we were led to believe when meeting with management at the beginning of 2012 that the company had taken the necessary steps to successfully tackle these internal operational problems.
Management’s strong emphasis on operational excellence since October seemed to deliver an improved and more consistent performance.
But the recent profit warnings clearly indicate that these internal measures were ineffective and that the company’s execution strategy in its newbuild business is operationally flawed.
Besides management’s loss of credibility from investors, clients’ perception that Lamprell can deliver complex newbuild lump-sum contracts in time and within costs has also taken a severe hit.
After these profit warnings related to its newbuild business, the market seems to assign zero value to Lamprell’s newbuild business and assumes that the profit margin of its order backlog for new rigs and liftboats is at best break-even.
In contrast, Lamprell’s core rig refurbishment and maintenance business (with market leadership in the Arabian gulf) is a fairly stable and higher margin business than the lump-sum newbuild business, which the company had just entered several years ago.
Without attaching any value to its newbuild business, we estimate that Lamprell’s refurbishment business alone could be worth about GBp 100-130/share, so the recent negative share price reaction appears to be overdone and the stock looks undervalued, especially when investors assume that the newbuild business can add value once the operational issues will be finally resolved.
However, given the severe loss in investor confidence, we believe that it will take longer than a year (in the absence of further profit warnings) for investors to regain some level of confidence in management’s ability to successfully execute lump-sum contracts and to deliver on its financial guidance.
Until then, we expect the share price to trade at a valuation discount to its peers and to its own intrinsic value.
The author’s comments are his own and are not necessarily those of ITP Publishing or Oil & Gas Middle East.
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