Trading updates - one good, one not so good

Monday, 13th July 2015 11:32 - by David Harbage

Genel is an upstream oil and gas business, owning significant resources in the Kurdistan region of Iraq. Coming to the market 4 years ago at £10, followed by 24 brokers hoping for further corporate action (overwhelmingly positive, 22 are Buyers and only 1 says Sell), the company has made impressive operational progress under ex-BP CEO Tony Hayward. Today, as he steps up to chairman, the company announces a trading update which emphasises the difficulties posed by a lower oil price and a difficult, ISIS-impacted, geo-political landscape.

Ahead of half year results, due 6 August, the group reports a 41% increase in production which is wholly offset by the lower global oil price. Improvements in the capacity of the Kurdistan-Turkey pipeline and progress on new projects offers significant longer term promise. Meantime, Genel's net cash pile (raised on listing) has fallen to US$250m, of which $378m represents a trade receivable from the Kurdistan Regional Government. This prompted a $230m bond issue in March, and today we hear that capital expenditure for 2015 has been cut by $50m to $150-200m.

The stock represents a high risk-reward play on global oil prices and on the emergence of a more stable political environment. While there is scope for improvement in the former (Brent $50 is anticipated in forecasting $350-400m revenue in calendar 2015) as demand from the global economy improves in 2016, the latter represents a bigger unknown. The market reflects these uncertainties and the shares languish at an all-time low of 466p, 2% lower today.

Genel stock is currently valued on a multiple of 13.3 times Sell-side brokers' consensus forecast of 35.6p earnings per share (EPS) for calendar 2016. Uncertain outlook overrides the prospect of 50% growth in EPS, over 2015, and certainly 'widow & orphan ' investors are unlikely to be attracted.

Telit Communications, previously featured in this Blog, describes itself as a global leader in m2m and IoT technology. Essentially producing components that enable devices to connect to other devices (Internet of Things, machine to machine) via wifi, with applications across a wide range of industries (notably auto). Such technology is changing the way businesses are run - Internet-facilitated platforms can, via smartphone and other controlling devices improve efficiency, reduce cost and deliver higher productivity - as well as increasingly the personal consumer (think control of electrical products in the home).

The company listed on the AIM in April 2005 and has an impressive track record of both organic and acquisitive growth of c20% per annum. Today's update suggests further progress in 2015 and 2016, in sales (+13%), profits and an ungeared balance sheet. CEO Oozi Cats (who owns 20% of Telit), provided upbeat comments on the immediate outlook (is due to publish full half year results on 3 August) and the shares responded by rising 2% this morning to reach an all-time high.

Unlike well-researched £1.1bn capitalised Genel, only two brokers monitor Telit, but a forecast 50% earnings growth next year (after 20% this) puts the stock on a forward looking Price Earnings multiple of 13.7x for 2016. A 10% premium to the wider UK equity market, but probably deserved.

Written by David Harbage 13 July 2015

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.