Small Cap Value Report (3 Nov 2015) - GTC, HTG, WOR

3rd Nov '15 by Paul Scott

18 comments 14372 reads

Good morning!

Any more questions for my interview with Tracsis (LON:TRCS) later this week? If so, please post as a comment below, or message me via Stockopedia.

Also, just to flag up that I added 4 more companies (Quindell, Epwin, LPA, and Vislink) to yesterday's SCVR in the early evening, so to recap on that, here is the link.

Getech (LON:GTC)

Share price: 35p (down 19.5% today)
No. shares: 32.9m
Market cap: £11.5m

Results y/e 31 Jul 2015 - checking the archive here, I last reported on this small oil services company here on 7 Aug 2015, when the company put out a reasonably upbeat trading statement, saying that whilst "slightly below current market expectations", it would still be reporting a doubling of profit to c.£2.0m. The outlook statement at that time also sounded upbeat, saying that Directors were "increasingly upbeat about the prospects for 2016".

The shares were 53p when I reported on that, and are now 35p, so clearly something has gone wrong. Let's have a look at today's announcement.

Sure enough, the P&L for y/e 31 Jul 2015 looks terrific;

Revenue up 26.9% to £8.6m
Profit before tax up 99% to £2.0m

Taxation - note that prior year figures benefited from a £574k tax credit, and although it reverted to a tax charge this year, the rate looks low at 9% - so this will inflate EPS in both years, especially last year

Dividends - full year divi held at 2.2p - so a very nice yield of 6.3%, but that's getting into "is it sustainable?" territory.

Balance sheet - is strong, with NTAV at £5.0m.

The current ratio is good, at 1.77

Note that cash, whilst strong at £4.7m, is partially offset by new borrowings of £1.0m, so net cash is actually £3.7m. Furthermore, I note that trade payables are unusually high, at £4.6m plus (very unusually) a further £1.0m of trade payables in long-term creditors. This is almost certainly deferred income - i.e. the other side of the double entry for cash that has been paid up-front by customers. So I reckon the underlying cash position (once the deferred income has unwound) is likely to be much lower than £3.7m.

So for valuation purposes, I would treat this company as being cash/debt neutral, to be on the safe side.

EDIT: I am grateful to eagle-eyed reader, "markusm" who has…

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derriman

3rd Nov '15

Very good and balanced report on Getech (LON:GTC).
Well done

markusm

Paul,

I note that Getech intangibles have risen from £513,476 to £2,046,499, which seems excessive combined with the large Goodwill coming from the acquisition of ERCL. There is no note explaining these intangibles. This is a little worrying to me and combined with the poor outlook caused me to sell this morning.

kenobi

As you say who knows when the oil sector will turn around (perhaps only the Saudis ?), however there is a strong argument to suggest it won't for a long time go back to the $100+ level, that although the Saudis will inflict huge damage on the shale/high cost sector, when they finally back off and let prices rise, as they reach $70 or $80 in quiet short timescales, shale capacity will be bought back on line, perhaps by new owners of the assets, and that shale will become the new swing producer, that increases during high prices and decreases during low prices. The one caveat about this is environmental, if it's found that shale is polluting drinking water or causing other enviromental damage and more burdens are added to it perhaps it will become less attractive. However at the same time, they're learning to drill wells and frack them faster and at lower cost. How big is the shale resource in terms of volume ? for the sake of this argument we can probably consider it infinite, the more important issue is what is the likely production rates that will be reached at various different oil prices ?

K

PS there may well be a political element of hurting the russians for invading ukraine here too, so unless you feel you have some insight into what might happen under a new president, (trump for example has promised to destroy any oil producing facilities held by isis ), it's a tricky one to call.

MacroVal

Forgive my ignorance -

"So I reckon the underlying cash position (once the deferred income has unwound) is likely to be much lower than £3.7m."

Record cash / def rev:

Debit Cash £100
Credit Deferred Revenue (£100)

Recognize income (unwind):

Debit Deferred Revenue £100
Credit Subscription Revenue (£100)

Why do you suggest unwinding the deferred rev will affect the cash position? The cash is in the bank.

Thanks

hayashi22

If WHI is the shop to Getech it sounds exactly the sort of stock they stuffed that poor old pensioner with!

Paul Scott

Hi MacroVal,

Yes, the cash is in the bank, but Getech has to incur all the costs of providing whatever services they have been paid up-front for. That's why personally I always offset deferred income against cash, because that cash really is the customer's money, paid up-front for services which have not yet been supplied by Getech.

As Getech has large, lumpy contracts, its deferred income could unwind, without being replaced by new deferred income. In that case, the cash pile would rapidly deplete, as it incurs all the costs of providing the agreed service to its clients.

Therefore, the way I look at it, the cash on Getech's balance sheet should NOT be regarded as belonging to the company, or available for other uses, since it could be used up in operating costs, if the deferred income were to unwind.

Regards, Paul.

Hi markusm,

Ah yes, I forgot about that! Many thanks for flagging up, I will mention that in the report now.
Getech has indeed capitalised a big lump of costs into intangibles.

Regards, Paul.

skyjacker

Hi Paul,

Another good report from you today. I'm regular reader but I do rarely post.

Re. GTC Long term payables, I think they might be related to ERCL acquisition earlier in the year, there was deferred consideration of £1.55m to be paid if all conditions are met in 3 years time. If oil price will remain low over this period consideration might be considerably smaller.

stock_Hunter

Hi Paul, Have you go through AMS announcement ? What is your view?

Dennism

Hi Paul - reference questions for Tracsis (LON:TRCS) later this week, I saw them at a ShareSoc seminar in Altrincham last week and John McArthur delivered a great presentation. When I did a bit more research on their sectoral numbers (revenues are provided but not profits), I noticed that more than half their revenues now come from the data capture, analytics and passenger counting sector which is more subject to competitive pressure and I assume lower margin. I assume their most profitable product area is the licences for their proprietary rolling stock and crew planning and analysis software - recurring rev's and high gross margins? There was welcome growth in this area in H1 but its only about 25% of the biz and I assume they have now penetrated a large percentage of the accessible UK rail and bus market so my concern would be a fully saturated market in the short term. The condition monitoring sector looks to be primarily trackside equipment sales and these are lumpy and, I suspect, limited in growth potential (there are only so many points and signals that need to be monitored). So, at present, I'm feeling a bit pessimistic on longer term growth and margin prospects unless John has more up his sleeve. It would be interesting to hear his views on my observations.

cyberbub

Paul thanks for another useful SCVR, frank and educational as always!

Sorry for the 'off topic', but you reported some months ago on a company that was manufacturing innovative fibre board, I think it was Netherlands-based? I can't for the life of me remember its name, and no luck searching. Can you remember what it is called, or its ticker?

Thanks.

Mark Carter

Just thought i'd add a little note about Oil & Gas: what we've been seeing this year is that clients had been both curtailing the volume of work they were doling out, but also demanding rate reductions. So it's been ta double-whammy.

If the oil price picks up, then of course all this could reverse again, as talent may have moved on, and it becomes difficult to recruit again. Maybe. Possibly. Perhaps.

jimbobjames2002

Thanks for a great report as always Paul,

Interesting point about free float – it’s not something I’ve really looked at that much. Out of interest, what minimum percentage level would you deem acceptable to not be too illiquid?

Cheers, James

You may be thinking of Accsys Technologies-Netherlands and UK based outfit.

its supposed to be in reply to post 11 by cyberhub

Thanks Hayashi, that's the one!

JDW72

Paul has prompted a thought..... I have been looking at Pressure Technologies and a few other O&G related shares wondering about the timing of buying. At some point in the future this is going to look like a great time to have bought but only the shares that are still around in the future!!

Perhaps we could between us pull together a list of smaller O&G related shares with strong balance sheets (assuming that this is the best predictor of longevity right now)? Then if an individual bought a basket of them in small quantities they would in effect create their own mini "Small O&G plays with strong balance sheets" fund.

There must be a way to create a Stocko screen that'd do an initial filter to take out the 75% of rubbish leaving a smaller set to dig into in a bit more detail.

Even if the oil price doesn't go back up much in a hurry, as far as I know we still need to keep finding the stuff and getting it out the ground so there has to be some money made by some of these firms.

4th Nov '15

Paul,

Yes, I see - seems sensible

Thanks

Small Cap Value Report (3 Nov 2015) - GTC, HTG, WOR

Getech (LON:GTC)

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Paul Scott

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