Global Spectrum Energy Services Plc

GLOBAL SPECTRUM ENERGY SERVICES PLC

Ticker:                            GSPECPLCNature of Business:    Transport Related ServicesLocation :                              Nigeria
Recent Price:           NGN4.19  52-Week High/Low: NGN4.19/4.19Estimated Fair Value:      NGN6.20-NGN8.70
Expected Return:      46.6%Consider Buy:                   Below NGN7.45Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Average

Company Overview
Global Spectrum Energy Services Plc (GSPECPLC), a maritime services and security systems company, started as a private limited liability company in March 2006. The company became a public limited liability company in July 2013. GSPECPLC’s shares were listed on the Nigerian Stock Exchange in November 2017.

Aspiral Sun Limited has 55% equity stake in GSPECPLC. The other major shareholders of the company are Criterion Nigeria Limited and Ocean 99 Limited with 15% and 5.6%  of the outstanding shares of GSPECPLC respectively.

Dr. Godwin Omene ceased to be the chairman of  GSPECPLC’s board of directors following his resignation in August 2020. Mr. Osahon Idemudia, a non-executive director, assumed the chairmanship in September 2020. Mr. Patrick Etim resigned as a non-executive director in August 2020 while Mr. Chidolue Okonkwo joined the board in September 2020.  Mr. Wasiu Akindele acts as the managing director of  GSPECPLC.

Investment Thesis
GSPECPLC provides offshore support services with its fleet of vessels that includes marine security escort vessels, security patrol vessels and platform support vessels. Exxon Mobil, Shell Petroleum Production Company, Total Upstream Nigeria Limited, and Addax are some of the customers of the company. GSPECPLC partnered with the Nigerian Navy in providing offshore security services. It also offers subsea installation services and distributes refined petroleum products in Nigeria.

The company’s performance, to a large extent, depends on the oil and gas industry as most of its revenue is from that industry. We believe that the ability to secure long-term contracts from some of its clients can make its earnings more stable. The lull in economic activities associated with the COVID-19 pandemic led to a year-over-year revenue decline of 9.7% in the year 2020. The gross profit margin was 21.6% compared to the four-year average of 26.7%. Operating profit and Profit After Tax (PAT) margins also trailed their four-year averages of 17.5% and 13% respectively. However, the company’s revenue has expanded by 26.7% on a 3-Year Compound Annual Growth Rate (CAGR) basis.

The resolve to broaden its product portfolio is a plus for the management. GSPECPLC applied for a modular refinery licence in the year 2020 in a bid to diversify its sources of earnings. Presently, the investors are not rewarded with dividends. But we expect investors to benefit from capital appreciation in the foreseeable future.

Valuation
A share of  GSPECPLC  has a fair value ranging from NGN6.20 to NGN8.70. Investors should buy at the current market price because the stock is undervalued. The expected return on the shares of the company is 46.6%.

Financial Overview
Revenue declined by 9.7% from NGN2.5 billion in 2019 to NGN2.2 billion in 2020. There was a 14.5% decrease in gross profit in spite of a fall in operating cost from NGN1.9 billion to NGN1.7 billion. The gross profit of NGN479.2 million amounted to 21.6% of turnover as against NGN560.8 million or 22.8% of turnover in the earlier year. However, the operating profit of NGN328.5 million declared at 2020 year-end was about triple the figure for the prior year. Fair value gain on investment property and foreign exchange gain were the drivers of the rise in operating profit.  Profit Before Tax (PBT) added NGN215.8 million or 191.5% to close at NGN 328.5 million. PAT rose from NGN75.1 million in 2019 to NGN209.8 million in 2020.

Gross profit margin shed 1.2% owing to a marginal increase in direct cost to turnover ratio. Vessel running cost, which forms the bulk of the direct cost, was 56.5% of turnover (2019: 56.7%). Though it leaped by 10.2% in 2020, the operating profit margin trailed its four-year average by 2.7%. The PBT margin of 14.8% and PAT margin of 9.5% represented a year-over-year increase of 10.2% and 6.4% respectively. Earnings \Before Interest, Taxes, Depreciation and Amortisation (EBITDA) of NGN424 million translated into a CAGR of 9.6% over the past three years. EBITDA margin was 19.1%, up from 8.9% achieved in the prior year. The working capital improvement achieved in the previous year was sustained with working capital increasing to NGN1.2 billion in 2020 from NGN855.1 million. Total assets have grown at a 3-Year CAGR of 9.6% while total equity has expanded by 44% over the past three years.

GSPECPLC has no interest-bearing debt as at the end of the 2020 fiscal year. Total liabilities amounted to 14.3% of total assets (2019: 11.7%) and 16.7% of shareholders’ fund (2019:13.3%).  The company is liquid with an acid test ratio of 2.5 times as against 2.4 times of the previous year. Free cash flow of NGN0.35 per share was produced for the shareholders in the year under consideration; it was -NGN0.05 in the previous year. GSPECPLC can meet its maturing obligations and its long-term solvency is not in doubt.

Business Risk
Piracy or natural catastrophe may result in loss of its vessels and associated revenue. In addition, the company is susceptible to volatility in the oil and gas industry since it accounts for the bulk of its revenue. A sluggish oil and gas industry means that some of the company’s vessels are unused leading to revenue loss. A wider product portfolio could provide a cushion against the unpredictable oil and gas industry.

Recommendation: Buy

Earnings Chart of Global Spectrum Energy Services Plc

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