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Getech PLC (GTC:LON) - Buying at the point of maximum pessimism

3/31/2020

12 Comments

 
Picture

Getech PLC (GTC:LON) is a tiny little firm floating on the AIM  market of the LSE.  It currently languishes just above it's all time low  and market sentiment toward the company  is unequivocally bearish.   Sounds like my kind of company.

GTC  operates in the O&G  Equipment and Services Industry, not a great business to be in right now!

 Here's a quick description of the company's history and operations;


"Getech Group plc is a leading consultancy providing geological and geophysical services to the oil, gas and mining industry. The client base comprises all the major and many smaller oil companies, as well as a number of major mining companies. The Company is based in Leeds, England, where it has more than 90 staff. It also has a subsidiary in Houston, Texas which operates primarily as a marketing entity. The Company originated as a spin-out from the University of Leeds, and since it started trading in 1986 has acquired the largest commercially available library of global gravity and magnetic data. In September 2005 the Company floated on the UK AIM stock market. In 2004 it established the Petroleum Systems Group. Since then it has built a multidisciplinary geoscience team which includes: geophysics, structural and tectonic analysis, geochemistry, palaeogeographic mapping, petroleum geology and palaeoclimatology. The Company maintains its technical quality and reputation through the quality and reputations of its staff and continuing innovation."


Here's a few numbers;
​
Market Cap = £4.14 Mil
Share price = 11.5p
Common = 37.6 Mil
52 week high/low = 32.2-10.5p
Adj. BV = £8.98 Mil (£12.38 Mil - Goodwill of 3.4 Mil)
Cash = £2.99 Mil
Total Liabilities = £4.3 Mil

Here's BV for the previous 3 years;

FY2018 = £12.74 Mil
FY2017   = £12.17
FY2016 = £12.16

And here's Rev's and  Net Profits/Losses for the same time period;

FY2018 = £8 Mil/£544k
FY2017 = £7.2/£65K
FY 2016 = £7/£1 Mil

Given the destruction we've seen in the energy industry I won't be surprised if sales and earnings get obliterated in the next year or two.  I'm not interested in the next year or two though, I'm looking  four or five years down the line.

​Now to the charts.

Picture
GTC 5 Yr Chart

GTC is down 76% on the five year chart. Previous support was around  26p  which you can see  throughout 2016, late 2017 and most of 2019. Then comes the sell off.

Picture
GTC 10 Yr Chart

The ten year chart starts to give us a bit more perspective. GTC  has been on a downward trend for some time now, in the past it's sold several hundred percent higher than it does today. Even now it's still down 16% on where it was ten years ago, the market currently hates this stock and yet I am drawn to it.

Picture
GTC Long-range Chart

 And now to the long range chart,  stretching all the way back to Oct 2005. GTC hit its all-time low of 10p back in April 2010 after building a base in 2009.   As it moved into 2011 it passed into the consolidation phase rising to  the low 20's.  Then, in 2012, it moved into the mark-up phase as the  rally began which saw the stock top out at around £1 in early 2014, a 10-bagger in under  4 years.

Since then the story hasn't been good, aside from the occasional short term rally it's been a continuous  downward trend which has brought us right back to where we are now, hovering above the all-time low.

This is when I like to buy, when everyone one else is running for the exit and off-loading their stock at any price they can get.

Now back to some numbers.

At this point I should probably let you know that  as well as the £3.4 Mil of Goodwill on the balance sheet there's also  around £4.26 Mil of intangible assets , this is data sets  and other such ephemeral stuff that Ben Graham would apportion a big fat 0 in value to. 

Let's scrub that off the BV too.

That leaves us with a BV of  £4.72 Mil,  around £600k above the current market cap. Not much of a discount now but I'm picturing where this stock could be in five years, not six months.

Total liabilities are  £4.3 Mil but we've got the cash of £2.99 Mil and receivables of 2.4 Mil.

​We've also got some property to boot too. 

Picture
GTC HQ

GTC bought this pretty little thing back in 2006 for  around £2.5 Mil and it is currently being carried on the books at £2.4 Mil.  The property is presently on the market and has been since 2018.  Whilst management has noted some interest  they've yet to receive any offers. This isn't surprising given all the uncertainty Brexit created and we are unlikely to see a sale any time soon either. Nevertheless, it's another hard asset on the books.

Share dilution is to be expected here, back in 2009 the common stood at 29 Mil and now it sits at 37.6 Mil. 

An approved share option scheme is in place  for around 2.5 Mil shares with  expiration dates ranging from 2020-2028. On top of that there's an unapproved options scheme which could see another 1.7 Mil shares added.  

Earnings are lumpy with GTC, some years it earns £1 or £2 Mil and in others it bleeds red. There's no doubt that the current destruction in the O&G industry is a  bad sign for the firm. A few years of hard times are ahead. 

Much like all the other moribund stocks that find a home in my portfolio, I'm betting that some will scrape through and make up for the ones that don't. GTC is just another of these tiny hated stocks that catch my eye.

My buy decisions are painfully simple these days, my primary focus is on the balance sheet and long range price charts . If the stars align in a manner I see fit I buy without thinking about future earnings  too much. I'm asking myself a few basic questions;

"Where has this company been and where might it be in a few years time if the situation improves?"

and

"Does it have the financial resilience to struggle through until the good times return?"

For those of you that want a more thorough analysis of GTC which drills down into the accounts I recommend UK Value Investor Maynard Payton's excellent post   here. 


There are many risks here for sure, maybe management decides to take the firm private to save costs or another firm swoops in to buy it up on the cheap. Maybe the downturn in the energy industry is a painful drawn out affair and GTC ends up on the scrapheap of business history like most other tiny firms do.


Then again, maybe they manage to navigate a path through the carnage, maybe they end up selling the property and shoring up the balance sheet. Maybe when all this doom in the O&G industry passes the orders start to come in  and GTC becomes another 10-bagger.

Maybe, just maybe... 


David

Long GTC:LON
12 Comments
mike
4/1/2020 09:06:30 pm

This interesting stock is likely to change strongly in line with the oil price. Alternatives would be, for example, a fund like PSCE.
Experts assume that the oil price can be halved again. Therefore, this is perhaps not yet maximum pessimism. Demand is very low (e.g. because of the very low air traffic) and the disagreement between Saudis and Russians has not been helpful. After all, the aim is also to drive certain oil companies into bankruptcy with the low oil price.
However, I expect the oil price to rise again in the long term.

Reply
David
4/2/2020 12:51:33 am

Yeah, there's a good chance this might drop a little more but not by much. I'm probably a bit early with this buy, you could just wait for the accumulation phase to move into the consolidation phase and still capture a multi-bagger, assuming no black swan event derails the thesis.

Reply
Alex
4/3/2020 01:10:20 pm

Loved the analysis! I'll definitely apply some of the points you searched for to my own company research. A couple questions.

1. How did you go about determining the value of the property in the companies financial data, did you just contact them?

2. What was the first couple of indicators that got you pursuing further research into this find; and your finds in general usually?

Reply
David
4/3/2020 02:45:18 pm

Hi Alex,

Thanks for taking the time to read my blog.

1) Click on the link I've embedded into the company name at the start of the post. Hover over the 'About Us' tab and then the sub tab named 'Investors' then click on the 'Results and Financial Reports' tab. Pull up the 2018 Annual report and scroll to page 53. You'll then see 'Freehold Land and Buildings' with the property being carried on the books at a value of £2.388 Mil as of 31 Dec 2018. The most recent report (Half year/Interim) doesn't break down PPE so you'll have to wait till 7th May to see the most recent carrying amount which will probably been around £50k less due to depreciation.

2) For listed stuff like GTC I pull up a stock screener (My favorite is tradingview.com) and then screen for companies with a market cap below £10 Mil/$10 Mil, I then screen out anything with more than 50 Million shares, the more illiquid the better for me to be honest.Once I have a list of the smallest most illiquid companies I can find I look at the long range price charts to see where the company has sold in the past and where it sits now in relation to past performance. I want to buy companies which are sat at all-time or multi-year lows with the potential to rise several hundred percent. Then I'll check for stuff like;

a) Insider ownership
b)Warrants/Stock options/Preferred shares
c)Liabilities with focus on bank debt (The worst type of debt!)
d) Cash position and other hard assets like property
c) past revenues and earnings.
d) Any signs of fraud or weird stuff,high and rising accrual earnings, weird related party transactions, frequent change of auditor or CFO's etc.


Mainly though, it's the balance sheet and the long-range chart which is my focus. I like the small illiquid companies as they are the most overlooked, the low share count also means if and when demand increases the share price moves up more dramatically.

With the OTC stocks my approach is the same but you can't screen those very well so I go through them one by one.

Regards,

David

Reply
Mike
4/3/2020 05:53:25 pm

It is not possible to buy this stock via interactive brokers (and maybe also via other big brokers?). As this is the largest broker worldwide, this could be detrimental/negative to the price development e.g. compared to an OTC U.S. oil stock.

Reply
David
4/5/2020 01:54:00 pm

GTC is a tiny illiquid little firm, it doesn't take much volume to move these types of stocks up and down. There's enough coverage of this from European and UK domestic brokers to facilitate sufficient trading. The more illiquid and thinly traded a stock is the more I like it. It is harder to accumulate but prompts larger upward share price movements and supply/demand imbalance when positive news emerges.

Reply
Mike
5/2/2020 07:31:18 pm

I am wondering if you could just apply the strategy from Walter Schloss related to the price chart instead of some more complex charting analysis. Schloss liked to buy stocks which were traded at a multi-year low, which is very simple.

Schloss wrote "When buying a stock I find it helpful to buy near the low of the past few years. A stock may go as high as 125 and then decline to 60 and you think this is attractive. 3 years before the stock sold at 20 which shows that there is some vulnerability in it."

Reply
David
5/2/2020 08:48:15 pm

Hi mike,

The approach that Ted Warren discusses shares much in common with Walter Schloss' penchant for buying at multi-year or all-time lows.They are essentially recommending the same thing which is to look to buy stocks when they are trading in a very low range on the price chart.

Ted Warren's approach doesn't involve any kind of complex analysis, we are simply looking at past price action, support, resistance and volume.

The most important thing is to have patience.

Reply
Mike
5/2/2020 09:08:37 pm

What would you think about a price that has only gone down without any clear support level; an example would be Dolphin Capital Investors (DOLC). I dont know if based on such a chart this stock could be a buy or a stay away situation.

A better chart would be that of Walker Crips Group (WCW) I guess with a current all time low similiar to the lows in the 90ties.

Reply
David
5/2/2020 09:59:33 pm

Generally I follow Ted's advice to look for stocks that have long-range price charts showing evidence of the four phases he outlines in his book;

1) Base (accumulation phase)
2) Mark-up (Rally though consolidations and intermediate bases can often be seen)
3)Top (Distribution phase)
4) Mark-down (Down trend in stock price)


Occasionally I will buy stocks that have trended down without any evidence of past support levels. I did this with MIRI and ENET as they were selling below net cash. Even then though, I saw that the stocks were bottoming out and volume had dropped off.

Reply
Peter
5/19/2020 02:48:24 pm

Great idea! Maybe worth checking out exasol, a new IPO in the big data software space.

Reply
Joe
12/10/2020 01:32:31 pm

Hi David

Good report here. Have you ever looked at MYX (Mycelx). It seems to fit with this research in what you look for in a share.

thanks

Reply



Leave a Reply.

    David J. Flood

    UK based Investor. I focus
    ​on Net-nets, Pico/Nano caps, AIM/OTC/Dark stocks & Special Situations. Balance sheets & Long-range price charts are my guide. Looking for inflection points. Do not construe my blog as investment advice, always conduct your own due diligence.  Caveat Emptor!


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