Geotechnical services specialist Getech (LON:GTC) shares dropped 25% in early trade as a financial update revealed that contract negotiations for the current year had overrun and were likely to drop into the following year:
The graph does show that very little has been happening in the business in terms of the share price in the last year. The picture is worse over the past decade, as the shares are currently at the level we saw in 2010. Since then, there has been a huge run-up as the shares exceeded 100p in 2014, but since then it has been mostly down.
We can also see some more data from this screenshot: Getech is less than a small-cap really, with a current market value of just over £7m. Trading in these shares is quite illiquid, and there is bound to be some huge volatility in results. In general, many tiny companies that have warned on profits have performed not too badly although arguably this may be due to the business rather than their size.
Getech are listed in the oil and gas sector, although they are not directly involved: they provide specialist geographical data in a way others cannot: for example gravity or magnetic maps. This therefore is heavily linked to the fortunes of the sector, although they are leveraging their skills for use in other sectors.
What’s gone wrong at Getech?
First some good news as the results are updated:
Against what remains a volatile macroeconomic and commercial backdrop for oil and gas exploration spending, Getech increased its new forward sales by 41%, expanded its orderbook by 48% and the Group’s cash balance closed the year at c£3.6 million (31 December 2018: £1.4 million).
This is comforting to see the cash rebound after a few years of going close to zero: this was aided by a contract sale of $1m of data in this year. Getech are driving forward with growing the orderbook and not being tied into lumpy revenues, but this has not worked yet:
Highlighting the importance of this, negotiations on several substantial transactions overran from December 2019. We remain in negotiation on these sales, the value of which had the potential to deliver material 2019 revenue growth. The fact that they did not complete in 2019 however is expected to result in a c£2 million year-on-year fall in revenue.
The conclusion is thus:
Getech’s results for the period ended 31 December 2019 will therefore be below market expectations. Lower total costs and continued investment in the drivers of multi-year sales will however limit the year-on-year impact on profitability, and across H2 2019 cash balances rose by £0.6 million
This is helpfully quantified even further, EBITDA between £0.6-0.8m. A broker note (available on Research Tree) lists the previous expectations: revenues £8.4m and EBITDA £2.1m, so this is a very large miss. Perhaps the relative fall of ‘only’ 20% in the share price reflects the markets belief that these revenues will return.
There is also a note of impairing some of the goodwill bought in through a 2015 acquisition: this years statutory results may well be loss-making.
Getech: Navigation in choppy seas
Much of Getech’s prospects lie in the wider economy, as oil and gas prices are a big determinant in exploration budgets. These are still sharply down since 2014, but the cyclicality infers that there will be an indeterminate time in future where prices may be high again.
Getech’s revenues and profits have followed this pattern: a high in 2014, but since then have been littered with profit warnings:
If these were figures for a different business, we may be asking ourselves why this is a good investment at all. But unlike other businesses, if the oil/gas market picks up the dynamics change heavily for Getech: their products and services become increasingly more valuable and their negotiating position increases. From today’s update we might guess that we are a long way from this point: over-running negotiations does not suggest a great deal of pricing power.
So a question may be to look at solvency: many companies in the past have gone out of business as their cash ran out waiting for difficult market conditions to turn around. This is doubly the case for Getech, as it appears that its products do require some type of investment, with capital expenditures averaging nearly £1m a year. These expenditures may be open to debate, as the development costs that have been capitalised by Getech are for its software. On balance I feel it is justified, but the key point is that this capex is needed to keep its products current and revenues need to keep up in order to balance the books.
One striking aspect is that Getech are quite conservatively run: they have managed to keep the cash burn modest and the company in a net cash position. There has been little debt, and little in the way of shares issued, although there are several million share options outstanding to directors, most of which are out of the money at the moment.
In balance sheet terms it all looks rather solid, with net tangible assets making up a good proportion of the market cap, and current assets being larger than liabilities. One caveat is that accounts receivables which have more than doubled to £4.9m in the past year. Why the payment cycle should be so slow is unclear.
A big factor in this level of conservatism is the board, who appear to be quite specialised in geology and show a good understanding of the cycles: financial position has been protected by eliminating costs rather than doubling down into a falling market. It goes without saying that their own remunerations appear quite aligned to the market as well.
Are Getech shares good value?
There is no denying that Getech is a high risk share. A further depression in energy prices would be very bad for the company. Most of their revenue comes from products rather than services. In this type of scenario it may be easy to imagine the company simply being acquired: its assets may be too good to go to waste.
This seems like a gamble on the markets recovering, and despite what they say sales will always be lumpy here: in 2018, one customer accounted for £2.5m of sales. The flip-side of this is that should contracts be won from larger energy producers, the impact on the company could be massive. With geology changing, the software is released on an annual release cycle, which compels users to pay for the latest data and such should have great retention rates as long as their budgets last.
I do not have much of an opinion on energy prices, but given the values at the moment I would be inclined to say that the share price is more under-valued than over-valued. 3/5.