Northland Capital Partners View on the City Gulf Keystone PetroleumHolders Technology


Holders Technology (LON:HDT) – CORP: Prelims

Market Cap: £1.5m; Current Price: 37.5p

  • Difficult FY14; some signs of improvement in FY15
  • Difficult FY14 across both the LED and PCB divisions with a 6% decline in group revenue to £13.5m (NCPe: £14.2m) resulting in a £0.4m negative swing in profitably to an adj. LBT of £0.3m (NCPe: £0.2m loss). Net cash was £0.1m better than forecast at £0.6m (FY13: £1.3m) but the final dividend of 0.25p results in a FY DPS of 1.25p (NCPe: 2.00p). 
  • Revenue in the PCB division was flat at £11.0m but profit fell. The German business, comprising 74% of the division’s revenue, had a good first half but a weaker H2. The UK business suffered from a general weakening in demand as well as two customers going into administration. In October, Holders announced the termination of a major PCB supplier agreement that accounted for c. 10% of group revenue. In light of this, the UK PCB business has been significantly restructured resulting in a £67k exceptional charge.
  • The LED division saw modest progress although revenue dropped 24% to £2.5m. There was growth in both NRGstar and Opteon Germany but Holders Components UK suffered with the loss of a major customer that went into administration. The outlook is more positive with an encouraging order book and a more evenly spread customer base.
  • We have reduced our forecasts at the top and bottom line and our DPS expectation for FY15 as we anticipate a more gradual recovery in trading and to reflect the loss of the PCB supplier agreement. We also introduce an FY16 forecast that sees better performance at the top and bottom lines enabling the resumption of a higher DPS.

NORTHLAND CAPITAL PARTNERS VIEW: A difficult FY14 with some attrition in the customer base and the loss of a long standing PCB supplier agreement. There was growth in the higher margin parts of the LED division that represents the main opportunity for the business going forward and the order book provides some cause for encouragement. The design cycle for custom LED solutions from Holders is long but once the solution has been designed in, production cycles are reasonably long – improving forward visibility. Holders has also built up a good portfolio of LED component manufacturer relationships (LEDs, heat sinks, drivers and lenses). The shares at the current level are trading at a substantial discount to NAV (c. 114p), including net cash of £0.6m. 


Gulf Keystone (LON:GKP): Suspends export sales 

Market Cap: £467m; Current Price: 52.5p

  • Suspends export sales as seeks payments for delivered oil and regular payment cycle
  • Gulf remains in dialogue with the Kurdistan Regional Government in order to receive outstanding payments and establish a stable payment cycle for future sales of export crude. In the meantime, the company has suspended export crude oil deliveries that were previously being trucked to the boarder and is instead supplying oil for local use to bolster short term finances.
  • This is expected to be a short term measure as the company continues to work towards agreeing regular payment cycles.
  • In the longer term, the company is seeking a pipeline solution for export sales that will significantly improve margins and is progressing a number of longer term financing options.

NORTHLAND CAPITAL PARTNERS VIEW: The announcement is a clearly of concern though it is understandable and no doubt necessary that the board has resorted to suspending crude exports in light of uncertainty over outstanding and future payments. Given a c. $9/bbl extraction cost, Shaikan production economics should stack up, even with trucking costs but the lack of clarity over receipts of payment is an ongoing concern and places an immediate strain on cashflow. Underlying Shaikan is an excellent asset but this news is indicative of the continued high degree of geopolitical risk in relation to this stock.

Week Ahead (09/02/15)

View from the trading desk

Markets have remained relatively robust since the advent of Eurozone QE. However, the Greek standoff dominated the news agenda this week. Initial thoughts were that anti-austerity group Syriza would be successful in renegotiating debt deals with its idea of growth bonds. However, this was thrown into uncertainty when the ECB rejected the proposal as unworkable and it now looks like this is a situation will run for a while. Conversely, markets took as good news that China Central Bank cut the cash reserves ratio for banks, freeing up capital to help stimulate lending in the Chinese economy.

Currency is continuing to have a significant impact on markets. The diverging conditions between the US and Eurozone has strengthened the dollar, impacting US company profits. QE means the outlook is weak for the Euro and relatively stronger for the dollar and sterling which could dampen growth prospects for the US and UK.

As the UK nears election season, the economy will come under increasing scrutiny. Halifax house prices released this Thursday suggested a stronger return to growth in the housing market with 1.9% increase in prices recorded in January. This may reflect the impact of stamp duty reforms and the first real increase in earnings for several years but there is some concern that the spike may be something of an outlier. Underlying data still shows mortgage approvals remain at low levels with December’s 60.2k approvals some 20% below the January 2014 high of 75.6k. 

Sales & Research thoughts

Oil Price: Some optimism this week given a rally in oil price. As pointed out in the FT’s Short View, the oil price actually rallied 20% from its January low this week before retracing slightly at +15% from its lows (12% on the week). However, the recovery was flattered by the fact that the commodity looked oversold due to OPEC’s refusal to support pricing. This led to considerable uncertainty as to where the price floor may be and the picture has not clarified much since then. As usual, it is impossible to predict the correct level but most areas of the oil sector would benefit from a greater degree of clarity. Most commentators expect oil to be somewhere in the region of the $50 per bbl this year. The updated Short Term Energy Outlook (STEO) from the US EIA is expected next week. In last month’s STEO, the EIA looked for Brent to recover to an average of $57.6/bbl this year, $75/bbl in 2016, with WTI estimated at $54.6/bbl this year and $71/bbl next year.

Given the significant capacity coming out of OECD countries as a result of capex cutbacks (though there will be a time lag) next year’s $70/bbl seems like a reasonable assumption, though there is still the small matter of a June OPEC meeting that could add materially to uncertainty and volatility. It is possible, though slightly leftfield, that OPEC may look to reduce its quota that could drive the oil price back beyond $60 this year – this could provide an olive branch to some of the smaller members that voted for a cutback last time.

It is equally possible (and also more expected) that the dominant Persian states could stick to their guns and make sure the policy of protecting market share and driving out shale production sticks. In this case, the price would remain depressed at current levels. For the sector, this still means some months of uncertainty, cost cutting and waiting out a firmer oil price as well as improved economics as contractors reluctantly adjust to the new reality of the lower oil price. This is likely to mean something of a hiatus on development plans adding to oil price led revenue declines until greater visibility becomes apparent in H215.

Mining: This week we initiated on Paragon Diamonds (PRG.L, BUY*, PT 12.9p). It is now fully funded to move the Lemphane Diamond Project to Stage 1 production by Q215. The Stage 1 production will allow Paragon to collect all the necessary information on diamond values and grade to produce both its maiden resources estimate and complete its feasibility study for Sate 2 production. Based on Paragon’s initial economic studies for Stage 2, we expect the project to have a NPV10 of $296m with an IRR of 68%.

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