Simon's article in IC today9 Apr 2014 16:19
Simon Thompson of Investors Chronicle has tipped it again today.
Primed for profitability
Shares in Aberdeen-based small-cap energy services company SeaEnergy (SEA: 35.5p) have proved volatile since I initiated coverage a couple of months ago ('Making waves', 20 February 2014), but are still up around 25 per cent on my recommended buy in price of 29p.
You would expect this given the company is in the early stages of a profit recovery and it will take time for investors to get a grip on the likely projectory of earnings, and the implications on the valuation. Having appraised last week’s results, I still feel there is significant untapped value in the company and believe that my 60p a share target price is a realistic goal, assuming of course the earnings recovery takes hold.
I was first attracted to the company after SeaEnergy acquired R2S, a profitable, cash generative and growing business, around 20 months ago. The purchase has gone to plan and in last week's full-year results SeaEnergy confirmed that R2S achieved cash profits "in excess of £2.5m" in the 12-month trading period to end-February 2014, ahead of target. That triggered the final earn-out payment of £4.6m to the vendors and means SeaEnergy has in effect purchased a fast growing and highly profitable business for a bargain basement total consideration of £10.1m.
In my opinion, the robust growth is set to continue because R2S's core service - Visual Asset Management - is proving as popular as ever. The VAM technology involves taking 360 degree spherical photographs of locations and then building up three-dimensional (3D) models. Data can then be embedded, indexed and managed. R2S initially provided these services to Police Forces and Courts across the UK, to model crime scenes and to index and manage associated evidential data. But it is the oil and gas sector where the real profit potential lies. That’s because VAM enables oil rig operators to keep a visual record of all key parts of an oil rig, monitor its condition and any changes to the fabric, with a view to carrying out maintenance. It’s cost effective too because the technology can be operated remotely, so it cuts overheads and reduces the need for trips out to the oil rigs.
As one would expect, R2S's core market is in the North Sea, where many oil & gas installations are reaching the ends of their design lives and the importance of maintaining asset integrity is increasing. Revenues are generated from both the "asset capture" project of initially setting up the 3D models and from ongoing software licensing fees charged to the operators of assets which have been captured. Since entering the oil & gas sector market, R2S has developed a strong market presence, and is now finding that clients, who have successfully utilised the company’s service on UK installations, are replicating the cost savings they have achieved in other geographies.
In tur
Sign In
Follow the stocks
