Getech: 2018 Results Showcase Impressive 24% Products Revenue Gain But Full Profit Recovery Remains Dependent On Stronger Oil Price

10 May 2019
By Maynard Paton

Results verdict on Getech (GTC):

  • Total revenue gained 11% to set the highest level since 2015. The dominant and more attractive Products division impressed with a 24% revenue improvement.
  • Progress was achieved in particular by a last-gasp $3.5m sale that contributed approximately 30% to the top line.
  • Profit was hampered by the loss-making Services division, although significant cost savings have since been made.
  • The direction of the oil price may largely dictate whether GTC’s oil-exploration software sells well (or not) during 2019.
  • The £11m market cap requires greater earnings to underpin obvious upside potential. I continue to hold.

Contents

Event link and share data
Why I own GTC
Results summary
Revenue and profit
H1 vs H2
Financials
Valuation

Event: Final results for the twelve months to 31 December 2018 published 07 May 2019

Price:
28p
Shares in issue: 37,563,615
Market capitalisation: £10.5m

Why I own GTC

  • Develops “market-leading” geoscience/oil-exploration software that enjoys multi-year contracts, a blue-chip client base and a recent track record of strong growth.
  • An £11m market cap could offer notable upside if a rising oil price prompts greater sales and leads to much improved earnings from a mostly fixed cost-base.

Further reading: My GTC Buy report | All my GTC posts | GTC website

Results summary

getech gtc fy 2018 results summary

Revenue and profit

  • Revenue was indeed £8.0m, Ebitda was indeed £1.2m and cash in the bank was indeed £1.4m.
  • Operating profit before restructuring costs came in at £447k.
  • The results were published one week after the scheduled date cited within the March update. Restating the group’s inventories as intangible items probably did not accelerate the bookkeeping prep.  
  • GTC used this RNS to publish the proper comparative figures — for the twelve months to December 2017 — for the first time. Last year GTC changed its year-end from July to December and released only 17-month figures.
  • Revenue gained 11% during 2018 to set the highest level since 2015. Profit remains well below the heyday levels of £2m:
Year to 31 December2014*2015*2016*20172018
Revenue (£k)6,5938,6387,0317,2158,019
Operating profit (£k)9691,987(126)145447
Finance costs (£k)325(22)(30)(25)
Other items (£k)--819(574)(197)
Pre-tax profit (£k)1,0011,992671(459)225
Earnings per share (p)5.215.773.250.151.35
Dividend per share (p)2.202.20---

(*year to 31 July)

  • Revenue is generated mostly from customers within the oil and gas industry. GTC’s statements regularly recap oil-price movements and suggest higher oil prices should deliver better progress.
  • The chart below shows the oil price:
getech gtc fy 2018 results oil price chart
  • The revenue increases enjoyed during 2017 and 2018 coincided with strong years for the oil price.
  • A $3.5m multi-product sale agreed during December contributed more than £2.5m — or approximately 30% — to the 2018 top line.
  • The Products division impressed with a 24% revenue improvement that followed a 19% improvement the year before:
Year to 31 December2014*2015*2016*20172018
Revenue
Products (£k)5,3644,7274,3205,1556,434
Services (£k)1,1663,9032,6282,0601,585
Gross profit
Products (£k)2,7523,1532,8223,5914,013
Services (£k)6142,20965868(225)

(*year to 31 July)

  • The Products division encompasses GTC’s proprietary data and software sales and has grown to represent 80% of group revenue and more than 100% of group profit.
  • GTC claims its data offersunparalleled resolution” and “constitutes a vital component of any oil-exploration campaign“:
getech gtc fy 2018 results example of data resolution
  • Management remarks about the Products division contained some encouraging terms (my bold):

Our Gravity and Magnetic Solutions team performed solidly in 2018, underscoring our market-leading position in this domain.”

“Data sales remained robust and our team’s unique and leading expertise in potential fields data processing, analysis and interpretation was recognised by a busy programme of Gravity & Magnetic service contracts throughout the year.”

“Our flagship Globe product, developed by our Geoscience Information Products team, goes from strength-to-strength.”

“Our work to re-position Globe was rewarded in 2018 by many of Globe’s super-major customers signing up to multi-year licence agreements.

  • The Services division delivered a poor performance due to the “challenging” market for geoscience consultancy.  Divisional revenue dived 23%.
  • Services reported a £225k loss before central costs for 2018. Underlying group operating profit could therefore have been (in theory) 50% higher at £672k had the division not existed.
  • Restructuring the Services division during Q4 cost an ‘exceptional’ £197k and “signs of improvement” have since been witnessed. Associated savings should amount to a significant £500k a year.
  • GTC said it would “target a return to a 25% margin for the Services division in the mid-term”.

Enjoy my Blog posts through an occasional e-mail newsletter. Click here for details.

H2 vs H2

  • The second half produced a much better profit performance than the first:
H1 2017H2 2017FY 2017H1 2018H2 2018FY 2018
Revenue (£k)3,0554,1607,2152,8795,1408,019
Operating profit (£k)(399)544145(522)969447
  • GTC’s data and product sales can be significant and unpredictable. 
  • A $0.9m data sale was concluded during early July while the aforementioned $3.5m multi-product sale was concluded during late December. 
  • Arguably H2 revenue of up to $4.4m — approximately £3.3m, or two-thirds of total H2 revenue — was generated by these two agreements. 
  • Whether GTC can continue to win large contracts on a regular basis is difficult to say. The $3.5m multi-product sale was referred to only as a “high-value sale” within the RNS small-print.
getech gtc fy 2018 results example of data

Financials

  • Minimal profit and awkward cash flow have left GTC’s accounts in an underwhelming state.
  • Margins and returns on equity have slid to very low levels:
Year to 31 December2014*2015*2016*20172018
Operating margin (%)14.723.0(1.8)2.05.6
Return on average equity (%)21.420.19.7n/a4.1

(*year to 31 July)

  • Free cash flow (excluding tax refunds) for the year was a negative £1.8m, all of which was due to adverse working-capital movements and the last-gasp timing of the aforementioned “high-value sale”:
Year to 31 December2014*2015*2016*20172018
Operating profit (£k)9691,987(126)145447
Depreciation and amortisation (£k)240366671813820
Net capital expenditure (£k)(190)(1,364)(856)(1,240)(952)
Working-capital movement (£k)(1,574)573(448)472(1,919)
Net cash (£k)3,4233,6941,8881,759468

(*year to 31 July)

  • Free cash flow (excluding tax refunds) for 2017 was positive at more than £0.7m. 
  • This time last year GTC claimed: “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.
  • This year’s working-capital movements have clearly scuppered that claim. Revenue during 2018 increased by 11% and yet free cash flow decreased
  • The “£0.6m increase” projection was not repeated this year.
  • However, GTC did reiterate its c85% fixed cost-base. Margins should in theory increase when revenue advances.
  • GTC enjoys a remarkable tax profile:
Year to 31 December2014*2015*2016*20172018
P&L tax (charge)/credit (£k)574(179)418517283
Cash tax (paid)/refunded (£k)(180)457(326)437514

(*year to 31 July)

  • The business has declared tax credits within four of the last five financial years. Cash tax refunds totalling £0.9m have been received.
  • GTC claimed: “To help our customers understand and resolve their exploration and operational challenges requires us undertaking pioneering research and development. Against the cost of this work we obtained corporation tax relief…
  • The R&D tax credits have been vital for shoring up the balance sheet.
  • Cash at the year end stood at £1.4m. Debt at the year end stood at £0.9m. Net cash therefore stood at £0.5m
  • The debt is secured on GTC’s Leeds office, which includes “a grand neo-Jacobean style carved wooden staircase” and “a superb glazed ‘peacock cupola’ dome”, and is in the books at £2.4m.
getech gtc fy 2018 results leeds office
  • The Leeds office remains for sale. “Volatile macroeconomic conditions” were blamed for a lack of suitable offers. A buyer is not expected before July. 
  • GTC remains “committed” to the office disposal. March’s statement said the company was “not a forced seller”.
  • GTC could really do with selling the office. Reducing the asking price may counter the “volatile macroeconomic conditions”.
  • GTC refinanced its debt during the year. £634k was repaid and replaced by £950k.  
  • The old debt incurred 2.04% interest above the base rate. The new debt incurs 2.75% above base. GTC’s lender may believe the risk of non-repayment has increased.
  • GTC capitalised product development costs of £0.9m onto the balance sheet. A similar sum is expected for 2019.
  • The depreciation and amortisation charged against earnings have not always covered the capitalised expenditure (see earlier table).
  • The balance sheet carries no pension complications.
getech gtc fy 2018 results example data screenshot

Valuation

  • A 28p offer price supports a £10.5m market cap.
  • The £2.4m Leeds office is surplus to requirements and suggests the underlying business is valued at closer to £8m.
  • Book value at £12.7m — which includes goodwill/other intangibles of £7m — is greater than the market cap.
  • Assuming profit is sustained within the Products division, cost savings within the Services subsidiary may help group operating profit approach (or exceed) £0.7m during 2019.
  • Ignoring the potential for tax refunds to bolster earnings, GTC’s profit really has to top £1m before the current market cap starts to become blatantly attractive.
  • GTC’s outlook for 2019 was subdued: “[T]he lengthening of the sales cycle that emerged in Q4 2018 has persisted into 2019 [and] the Directors believe that customers remain cautious over the early release of their exploration and new business budgets.”  
  • Customer demand during 2019 could wax or wane simply due to the direction of the oil price.
  • An absence of a repeat, $3.5m multi-product sale would hamper progress this year.
  • References to “diversified organic growth” and “acquisitional growth” suggest GTC is keen to lessen its dependence on oil and gas customers.
  • The present low levels of profit and net cash do not readily flag a strong acquisition war-chest. The existing business ought really to be improved first.
  • Maybe one day GTC’s software and data products could re-exhibit the attractive economics of yesteryear — or at least something close to them. 
  • Between 2012 and 2015 for example, the operating margin averaged 21% and return on equity topped 27%.  
  • Shareholders can only hope the oil price eventually prompts greater demand for GTC’s software and data. 
  • GTC also said: “As the markets into which we sell stabilise, we also see potential to reinstate dividend payments.
  • GTC last declared a dividend during 2015.
  • Similar to the talk of acquisitions, the present low levels of profit and net cash do not readily indicate a business that should be contemplating dividends just yet.

Maynard Paton

PS: You can receive my Blog posts through an occasional e-mail newsletter. Click here for details.

Disclosure: Maynard owns shares in Getech.

Leave a Reply

Your email address will not be published. Required fields are marked *