Getech: Signs of life from a multi-year depression

14th Feb '19 by AnonymousUser542644

11 comments 2861 reads

Before I get into what I see as a very interesting investment play, I will caveat up front that Getech is not a business you can trade in and out of. Its really very illiquid, with a spread often of over 5% so bear this in mind. Regardless, with an ask price of 31.6p, if Getech plays out as I expect over the coming 12 months, then I do not believe it unrealistic to see this trade 50%+ higher. The market capitalisation at the ask price is approx £11.8m, a true micro cap. I will try to keep the investment thesis brief.

What does Getech do in as short as possible? Products (Data oriented) = 70% of revenues. Services (consultancy) = 30% of revenues. The products side is truly differentiated. Getech has Gravity and Magnetic data of global coverage "which is multiple times larger than our closest peer." And for example, Getech's Globe software has a retention rate over 95%, and saw a 23% increase in the customer list in 2017. The product quality sees Getech catering to some of the largest oil and gas companies and related businesses in the world, including (to just name a few)..... Shell, Maersk, Eni, Cairn, Total, Glencore, Anadarko, the UK Oil & Gas Authority, ExxonMobil, Statoil, BP, and BHP Billiton. Other sectors include mining. The new strategy over the past 12 to 18 months has been to "place data, software and information products at the heart of our business", driving recurring revenues and reducing lumpiness of growth.

Being conservative, +10% off £7.2m = £7.9m. Say half drops through to adjusted ebit (there is £200k of relocation costs, genuinely exceptional), and that's an operating profit of somewhere around £400k - £450k with similar free cash flow, a far cry from the £500k operating loss in the first half of the year. Financing costs should be minimal. But the first half operating loss was a red herring. In driving recurring revenues, Getech is basically moving revenues out of the current period and into future periods. Total sales closed (i.e. revenues for all periods) were actually +39% in first half, and that was before a large $0.9m data sale which narrowly missed the period end. Anyway, the full year should show both an operating profit and free cash flow and…

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peterclothier

15th Feb '19

Good write up Eric. I'm a holder for the last year, so am a bit biased. Some thoughts:

-The CEO has done a good job since he arrived in cutting costs in the face of the downturn in exploration expenditure. Cost base down 32% in the last of couple of years.

-The services side (ERCL) has been hard and is low margin, apparently lots of people who were working for the majors are working for themselves out of their back bedrooms.

- The focus is on higher margin repeat revenue from the products side (software) the revenues from which the market ascribes a higher multiple of earnings. The company is seen as oil & gas services cyclical.

- The data sales are very high margin, but are lumpy (and ascribed a lower multiple by the market). The data sale announced at the beginning of the year a case in point, as is the Sierra Leone licensing round delays. I get the impression whilst they like the data sales, they would rather increase software products.

gus 1065

Hi Eric.

Thanks for the write up. I bought some of these at the end of 2015 as a play on a recovering oil price and increased sector investment. In that time there have been no dividends and I can report that mt my original entry price was ...... 30p. Not sure this will ever shoot the lights out but I agree the asset backing suggests limited downside and TBH a 10%+ bid/ask spread puts me off selling or buying any more for that matter. Maybe one day someone will buy them out for their IP but in the meantime they’re in stasis.

Gus.

AnonymousUser542644

Good post Peter. Appreciate the contribution.For Getech to make long term progress, absolutely they need to focus on the information products and software products, and also consultancy as the core competencies.The data sales I view as unexpected upside per year. I think the good news on the data side form here is that we're moving out a period of extreme and prolonged softness, and so the level of large data sales since 2015 had been incredibly low compared to the several years which preceded them (tick up in 2018).

It looks like the gears are slowly starting to turn again on the Sierra Leone side, so with a bit of luck, might start getting some expectation flow in the later part of the second half this year. But not a core attraction IMHO

https://www.offshore-mag.com/articles/2019/02/sierra-leone-commissions-extensive-2d-survey-for-offshore-license-round.html

Thanks, Gus. Absolutely agree with what you've said. One of the biggest risks with Getech is the opportunity cost, especially given the true spread is normally 2-3p, so over 5%. So any new investors really need to be comfortable with that. Works both ways from a very low market cap starting point of course.

Since 2015, the big issue is that also production capex has recovered somewhat (though not even that much), exploration capex hasn't really, and so Getech has had to embark on some of their self help initiatives and targeting more US onshore exposure. Clearly any oil price rises from here are good news, but a very bearish scenario of a return to $30 oil probably unwinds some of the uptick the business has generated in 2018. Downside looks limited, but then stuck here for another year isn't an attractive bet. With oil where it is, I think exploration taps start turning out through 2019 given those budgets have been very tight the last couple of years, and a number of companies have completely halted exploration. But that almost always turns out to be cyclical.

The one thing that does intrigue me most at the moment is BGF and Alto taking pretty decent % stakes. Small in absolute terms, but normally institutions just wouldn't bother with anything at this market cap unless, IMO, they were impressed by the management, rated the company itself, and perhaps saw a way to help the company expand. I wouldn't rule out acquisitions to bolster the business.

Turning adjusted ebit positive again, and keeping it there is critical, so my expectation is that the market will take more notice once results are out. Free cash flow should hopefully also be positive, and almost certainly excluding the expected exceptional relocation costs.

TMFMayn

16th Feb '19

Hi Eric

Thanks for the good write-up. I have some GTC shares and…

“The products side is truly differentiated. Getech has Gravity and Magnetic data of global coverage "which is multiple times larger than our closest peer." And for example, Getech's Globe software has a retention rate over 95%”

…is mostly why I remain invested despite the shaky record of the last few years.

“Being conservative, +10% off £7.2m = £7.9m. Say half drops through to adjusted ebit (there is £200k of relocation costs, genuinely exceptional), and that's an operating profit of somewhere around £400k - £450k with similar free cash flow, a far cry from the £500k operating loss in the first half of the year.”

I must admit I was sceptical of this projection, but your post has promoted me to revisit what is going on.

GTC has said:

“With c85% of our cost base fixed, each 10% increase in revenue would broadly translate to a £0.6 million increase in free cash flow.”

In the H1 results presentation, the “simple profitability formula” was given as total costs of £7m a year with 85% costs as fixed, which would create positive free cash flow if revenue was greater than £7m (pre financing and working capital).

So with revenue of £7m, fixed costs at 85% are £6m and variable costs are £1m.

So with revenue moving to £8m for 2018, fixed costs should stay at £6m and variable costs should arguably increase to £1.4m given “each 10% increase in revenue would broadly translate to a £0.6 million increase in free cash flow”.

That could mean a £0.6m profit 2018 could be on the cards?

I may have under-estimated GTC’s profitably here. I had been hoping for a break-even performance for 2018. That said, I would have thought if GTC did strike a decent H2 profit — the sums suggest £1m-plus — then the early January trading statement would perhaps have confirmed it.

“Between 2011 and 2015, Getech averaged £1.42m of EBIT and has engaged in counter cyclical M&A since, buying ERCL (a specialist upstream o&g consultancy) and Exprodat (GIS software business) which together were likely >£6m of normalised revenues”

I like the phrasing “counter cyclical M&A” — sounds as if GTC was snapping up bargains! Which certainly was not the case with ERCL — average sales per month dropped from £352k to £113k between 2015 (year of purchase) and 2017. Exprodat has not fared well either, but its software/products appear more robust for shareholders.

“total assets minus total liabilities of £8.51m, >70% of the market capitalisation.”

True, but the view on intangibles is significant here. Are they worth book value? Difficult to know for sure. Amortisation of £400k-plus was charged last year against ‘legacy’ intangibles that will eventually be valued at zero. I think ultimately GTC’s valuation will be supported by positive cash flow/earnings, and perhaps an outside chance of a windfall from the Leeds property sale.

The other point I would make concerns the new boss.

My notes say he has been a geologist at Shell, an Oil & Gas equity analyst at Deutsche Bank and the finance director at Salamander Energy. So a pretty heavyweight CV — which does beg the question why he decided to take charge of a struggling AIM micro-cap.

I like to think he has real conviction about GTC’s software and data. The new leader has done well to cut costs and refocus the business from an academic heritage to one with a greater commercial focus, and I particularly like the cost-base tables and the aforementioned “simple profitability formula” he now provides.

I think all we need now is more O&G customers buying the software.

Maynard

PS: my Blog write-ups on GTC are here:
https://maynardpaton.com/categ...
and my GTC presentation write-up is here:
https://maynardpaton.com/2017/...

Excellent post Maynard; thank you for taking the time.

I think the adjusted EBIT numbers you come up with should be pretty accurate. I like to be slightly more conservative so that's why I'm looking for 400 - 450k of adjusted EBIT and then a couple hundred k or so less on the stated level. Hopefully there has not been cost creep. Getech have said

"We anticipate further cash tax receipts from R&D tax allowances in 2018; our current tax receivables balance for 31 December 2017 totalling £490,000"

and although there were h1 receipts, it should mean Getech reporting a half decent post tax profit in 2018 even on the stated level. My gut is that the market is definitely not expecting that just because the announcements from the company have not been uber transparent and the January trading update was really half hidden away. There was a director buy after that announcement so fingers crossed they joined the dots.

I do agree on the M&A somewhat.

ERCL cost £2.75m initially in cash and shares, with £1.55m in deferred consid but which was then written down by about £850k. They did flag at the time of acquisition that "In its first year of trading as ERCL, it delivered (unaudited) income of £3.8m and profit before tax in excess of £1.2m. This was supported by exceptional contributions from work in Africa." So I imagine they wouldve paid about 1x normal sales. expect they would've hoped the oil downturn would have been much shorter lived than it has turned out to be.

The intangibles are definitely a key consideration. I know that Paul likes to largely ignore intangibles, but for a data and software company, it makes little sense to, as that's what they're selling to generate cash! Put another way, the $3.2m sale in January 2019 was pretty much from those intangibles. So the book value really does likely understate their value. It's just that, you need a willing buyer, and single buyer principle doesn't work. Someone drilling randomly in Moldova may have a need for a particular book of data; it could be in 5 years, or tomorrow. Given the size of the book value, I'd be pretty confident that if anything it lowballs the value of Getech's intangibles.

On the CEO, the CV is good, and actually, the fact he has worked in the analyst industry is good as it should give him a good appreciation of shareholder value. That is plastered across various presentations and annual reports. And he seems serious about it, given the difficult decision to slash costs the last few years. I suspect now that Getech has gone through the contractionary phase, they're now in a very good position (with plenty of operational leverage) if the industry outlook starts to firm.

I think Getech is pretty well off the radar. The last few years haven't been good for shareholders (pretty stagnant with any uplifts sentiment driven), but that's just a reflection of where the oil and gas industry has been from an exploration perspective. The company has done a lot of self help under the new CEO and the strategy is clear. Fingers x'd! From here I don't think it ludicrous to think Getech can get back to £1.5m of sustained EBIT over the next couple of years and would expect the market cap double by that point.

Eric

Richard Goodwin

17th Feb '19

Thank you @ericpiralta and others. I have a background in online publishing and had been keeping an eye on Getech (LON:GTC) but it had slipped my attention for the past year or so. Strategically it is definitely the bottom of the market so if the oil exploration market bounces there should be strong upside. I think the timing is still in doubt though notwithstanding the positive noises from the company. I went through the data and I do agree with the short term profit estimates from this thread.
I would be very interested to know more about how subscriptions work. The forward sales GTC discusses are all for within the next 18 months. A truly great subscription model tends to focus on annual renewals but with almost all subscribers renewing I don't know enough about GTC to understand how they fit this model (excluding the services side of the business of course) . Craneware (LON:CRW) manages annual renewals above 100% and they have been rewarded by the market with a sky high P/E.

Hi Richard. Yes timing is a key issue, though I think the positive year end profit will be well received and I imagine in the next few weeks. They had said in January that the big lurch down in the oil price wasn't a good thing, but hopefully a steady recovery will bode well. it's not like there's a lot of capex to take out of exploration again, so worst case scenario is probably a flat line of recent years. I don't really think it's a probability, but I'd say there's a 20% chance they re-introduce a very small <1.5% yield divi at the FY results. But they may well be minded to hold that back and invest into products instead.

The data sets are normally one off sales. Need some gravity and magnetics, or past drill or seismic data for an area near where you're looking? Then here's a package and it's going to cost X. Rather cyclical as has been demonstrated.The Globe program and other products are the subscription part. We don't know how much of the products set it really is, but I'd imagine it's got to be at least half in a normal year (a third of the total business)

That Globe product is an annual release cycle since 2017 and is an annual commercial subscription pricing model as well. 95%+ renewal rates on that and the sparse data suggests strong growth. Craneware has a much larger addressable market, but then the market value here is lightyears away anyhow

*I should add that I think customers can still buy a multi year licence to Globe so its a customer sided decision over whether to go for a multi year licence or a subscription

18th Feb '19

Holdings RNS close to the COB today: Alto Invest have increased their stake to over 10% of the share capital. So they've gone from zero to >10% in around 6 months

https://www.investegate.co.uk/getech-group-plc/rns/holding-s--in-company/201902181618224012Q/

26th Feb '19

I Imagine results should be within a fortnight and potentially even this week. I will post my summary on the day of results, probably in the evening, once I've had time to digest all the details

Getech: Signs of life from a multi-year depression

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