Lamprell used to be a very large pile of cash with a mediocre heavy engineering business attached.
Focussed on the Oil and Gas market and based in the United Arab Emirates, when the Oil price collapsed much of Lamprell’s business went with it.
Faced with the opportunity to cut its cost base to reflect the business levels and conserve cash Lamprell instead decided to expand into business lines where it knew very little. The most staggeringly profit destroying, (to date), was building and installing wind turbines. But management has happily thrown millions, with little to show for it, at various other initiatives over the last few years.
This for a while created a “trading” situation in which the price would be circa £1. Then there would be a press release detailing the latest management failing, the price would then fall towards 70p. After a short while the share would rise as it was felt to be oversold and then move back up to £1 as new investors saw the cash pile and or heard “positive” news as management began a new initiative. With Lamprell beginning a new initiative is usually a positive to the share price, actually delivering a report on how the initiative has been invariably messed up is not. So buy at circa 70p and sell at £1 has been a fairly easy trade for a while.
This may be coming to an end. The 1/2 year to June 2018 were once again a mix of initiatives that have been started, but are yet to really deliver anything of value and the real results that have continued to degenerate. The company, which hasn’t been much above break even, has been made loss making. Despite the up turn in the global oil price and the accompanying better than last time results from many in the industry Lamprell has just managed to dig the hole faster.
Given management’s increasingly long term inability to actually deliver on a successful (genuinely profitable) initiative the key underpinning of the valuation has been cash. At 30 June 2017 this was at £305.9m. It has now been driven down to £167.8m and there are significant funding commitments on some of the projects Lamprell is involved in.
Management does provide weak revenue guidance, which is probably more of a reflection of their genuine lack of understanding as to what is happening rather than any attempt to hide their situation from competitors. However as so much of their revenue is either loss making or virtually nil margin even this is not much help in assessing future profitability. Management clearly don’t know.
So on the positive side you have a still quite large cash pile and management claim that part of the decrease in cash is due to working capital and presumably should reverse. You also have an industry that is delivering a general upturn and Lamprell may be able to rise with all the other boats. Equally whilst management have displayed no success in delivering on any new project/strategic initiative their has to be a hope that even a monkey if it throws enough darts will hit the dartboard on occasion.
On the negative side there is a lot less cash then there was for management to fritter away. If the business was to actually start growing there would presumably be more of a working capital requirement. Management have been throwing darts for some time and so far have only managed to hit the shareholders feet, repeatedly.
Whilst it was profitable whilst it lasted I no longer see Lamprell as an easy trade between 70p and £1 and I would not buy it again on that premise.
I do have a small holding and will not be adding in the short term. I will however keep the holding and monitor the situation. It would only take one decent win for the shares to improve and given the investments the company has made in the UAE and Saudi there has to be the potential that someone with local knowledge could look to either take over projects for cash or indeed the entire business.
This is not IMHO any longer a trade, nor is it a value play. Its optionality on the O&G market and Lamprell being lifted despite itself. If I needed the cash this would certainly be one I would sell for a better idea.