Lizard
29-12-2013, 12:46 PM
OTC is another share that hasn't yet had much mention on ST other than in Steve Fleming's "Downgrade File (http://www.sharetrader.co.nz/showthread.php?6102-the-Downgrade-File-troubles-with-the-ex-100&p=413763&viewfull=1#post413763)" - where it got a mention for its profit upgrade in June.
The listed roots of OTC start with the ill-timed listing of Emerson & Stewart (ESW) in 2008 - a company formed in 2005 and described as "a progressive engineering and project management group that provides advisory, project implementation and development services across the resources, infrastructure and energy sectors". Co-founded and backed by several known ASX company "names", the float was over-subscribed, raising $8m at 20cps and assigning a market cap of $24.7m. In true bull-market style, it seemed investors were willing to overlook the mere $4.4m in prior year revenue and were happy to accept forecasts of over $11.3m in first half revenue for 2009. The prospectus was also note-worthy for seemingly burying the fact that two-thirds of the company was to be retained by existing holders, despite new holders contributing 80% of the funds.
Following the tried-and-true formula for pump-and-dump IPO's, the listing occurred just prior to end of the 2008 financial year and the company was able to trumpet beaten forecasts for the FY. Then, as night follows day, the agm presentation contained a significant 26% downgrade to those ambitious first half 2009 revenue forecasts at just $8.3m revenue. Although a respectable first half profit and high cash holdings were reported, the GFC timing of the listing and deteriorating outlook sent the share price down to below one quarter of their listing price, bottoming at around 4.5cps in March 2009.
5251
A well-executed buyback in May 2009 saw the company pay-out the founder and former director at an average of 7.5cps, cancelling 25m shares and creating an ESOP with the remaining 6.25m, which aided a recovery from the lows. However, a very weak second half and a failed merger with Greencap saw the beginning of a longer share price ebb. In early 2010, with revenue starting to look like it was heading back to pre-listing levels, ESW took the smart move of acquiring an old established business in Whelans for $3.7m in scrip payment at 12cps and $5.3m in staggered cash payments. Whelans operated in the sector of surveying, mapping and town planning. Strong revenues from Whelans masked the decay of the original ESW, although were insufficient to avoid declaring a loss in 2010.
The next step in early 2011 was the larger acquisition of Ocean To Outback Contracting or OTOC. While OTOC had a number of divisions, the core business was based around turn-key mining village installations. At this point, the shares were consolidated on a 2 for 7 basis. The acquisition cost was $20m plus earn-out, paid in 50% scrip/50% cash and funded by a placement and rights issue at 20cps (post consolidation - equivalent to about 5.7cps pre-consolidation). OTOC brought an historical $52m and forecast $89m of revenue to the group, which, at least on a revenue basis, made it about 10 times better value than the original ESW listing...in July 2012, the original ESW consulting was quietly sold off for around $1.15m - around half what the founder director had received in the buyback of his shares and a fraction of the $8m investors had stumped up with 4 years prior for just 32% of the business.
Fortunately, all was not lost for original investors, who at least now held a small stake in the combined Whelans/OTOC, now listed as OTOC (OTC). Both business arms performed exceptionally in their first year (2012), with combined revenue of $152m and NPAT of $5.5m. The share price bottomed at 7cps (about a 90% loss for original investors) before beginning a slow recovery. Not surprisingly, 2013 was a year of consolidation for OTC - the market for mining camps and refurbishments well off its peak, although buoyed by government work at Nauru. Excluding the loss from discontinued ESC, NPAT came in at $5.2m. At current share price of 10cps, this puts it on a historical P/E of 3.6 and P/S of 0.17 (similar metrics to BYL which has been covered on another thread).
It is said that cyclical companies always look cheap at the top and expensive at the bottom - on this basis, perhaps there is still more pain to come. New mining camp investment is probably going to be thin on the ground for a while and OTOC is attempting to diversify revenue streams in communications and facilities management. However, Whelans continues to maintain steady revenue growth and OTOC has continuing government work at Nauru which will help. Debt levels appear manageable and first quarter revenue of nearly $40m suggests a good start to 2014, with a diversified order book.
A recent sell down by the major shareholder and MD to institutional shareholders appears well-managed and may also indicate some institutional interest and greater liquidity.
While OTC may be in a difficult contracting space, they do appear to be making the best of things - and at a market cap of $19m, may just be too cheap - with the chequered listing in the past, there is room for a possible re-rate, or perhaps a friendly takeover.
The listed roots of OTC start with the ill-timed listing of Emerson & Stewart (ESW) in 2008 - a company formed in 2005 and described as "a progressive engineering and project management group that provides advisory, project implementation and development services across the resources, infrastructure and energy sectors". Co-founded and backed by several known ASX company "names", the float was over-subscribed, raising $8m at 20cps and assigning a market cap of $24.7m. In true bull-market style, it seemed investors were willing to overlook the mere $4.4m in prior year revenue and were happy to accept forecasts of over $11.3m in first half revenue for 2009. The prospectus was also note-worthy for seemingly burying the fact that two-thirds of the company was to be retained by existing holders, despite new holders contributing 80% of the funds.
Following the tried-and-true formula for pump-and-dump IPO's, the listing occurred just prior to end of the 2008 financial year and the company was able to trumpet beaten forecasts for the FY. Then, as night follows day, the agm presentation contained a significant 26% downgrade to those ambitious first half 2009 revenue forecasts at just $8.3m revenue. Although a respectable first half profit and high cash holdings were reported, the GFC timing of the listing and deteriorating outlook sent the share price down to below one quarter of their listing price, bottoming at around 4.5cps in March 2009.
5251
A well-executed buyback in May 2009 saw the company pay-out the founder and former director at an average of 7.5cps, cancelling 25m shares and creating an ESOP with the remaining 6.25m, which aided a recovery from the lows. However, a very weak second half and a failed merger with Greencap saw the beginning of a longer share price ebb. In early 2010, with revenue starting to look like it was heading back to pre-listing levels, ESW took the smart move of acquiring an old established business in Whelans for $3.7m in scrip payment at 12cps and $5.3m in staggered cash payments. Whelans operated in the sector of surveying, mapping and town planning. Strong revenues from Whelans masked the decay of the original ESW, although were insufficient to avoid declaring a loss in 2010.
The next step in early 2011 was the larger acquisition of Ocean To Outback Contracting or OTOC. While OTOC had a number of divisions, the core business was based around turn-key mining village installations. At this point, the shares were consolidated on a 2 for 7 basis. The acquisition cost was $20m plus earn-out, paid in 50% scrip/50% cash and funded by a placement and rights issue at 20cps (post consolidation - equivalent to about 5.7cps pre-consolidation). OTOC brought an historical $52m and forecast $89m of revenue to the group, which, at least on a revenue basis, made it about 10 times better value than the original ESW listing...in July 2012, the original ESW consulting was quietly sold off for around $1.15m - around half what the founder director had received in the buyback of his shares and a fraction of the $8m investors had stumped up with 4 years prior for just 32% of the business.
Fortunately, all was not lost for original investors, who at least now held a small stake in the combined Whelans/OTOC, now listed as OTOC (OTC). Both business arms performed exceptionally in their first year (2012), with combined revenue of $152m and NPAT of $5.5m. The share price bottomed at 7cps (about a 90% loss for original investors) before beginning a slow recovery. Not surprisingly, 2013 was a year of consolidation for OTC - the market for mining camps and refurbishments well off its peak, although buoyed by government work at Nauru. Excluding the loss from discontinued ESC, NPAT came in at $5.2m. At current share price of 10cps, this puts it on a historical P/E of 3.6 and P/S of 0.17 (similar metrics to BYL which has been covered on another thread).
It is said that cyclical companies always look cheap at the top and expensive at the bottom - on this basis, perhaps there is still more pain to come. New mining camp investment is probably going to be thin on the ground for a while and OTOC is attempting to diversify revenue streams in communications and facilities management. However, Whelans continues to maintain steady revenue growth and OTOC has continuing government work at Nauru which will help. Debt levels appear manageable and first quarter revenue of nearly $40m suggests a good start to 2014, with a diversified order book.
A recent sell down by the major shareholder and MD to institutional shareholders appears well-managed and may also indicate some institutional interest and greater liquidity.
While OTC may be in a difficult contracting space, they do appear to be making the best of things - and at a market cap of $19m, may just be too cheap - with the chequered listing in the past, there is room for a possible re-rate, or perhaps a friendly takeover.