Today, I want to look at the investment case for Sirius Minerals. I’m also going to consider a small-cap stock that’s trading at a 50% discount to book value. Is this a fantastic bargain, or could things get much worse?

Why is Sirius stock so volatile?

Over the last two years, the Sirius Minerals share price has ranged between about 17p and 40p. As I write, the stock is near the top of this range, at 35p.

This kind of volatility isn’t unusual for a miner with a long development timeline and no revenue. Market sentiment swings between risk and opportunity, without the reality of profits to calm things down.

I think Sirius has made good progress so far. Sales agreements have been signed for half the mine’s planned 2024 production and construction work is on schedule. However, production isn’t expected to start until 2021. And despite having raised $1.2bn of financing in 2016, the company still needs to raise another $3bn to complete the project.

As my colleague Graham Chester explained recently, there’s still a lot that could go wrong.

When I’d buy

In my view, Sirius shares are probably nearer to a peak than a trough at the moment. They’re certainly too expensive to tempt me.

If I wanted to pick up stock to build a long-term position here, I’d be looking for an entry point of no more than 25p.

Risk vs opportunity

Shares of offshore platform operator Gulf Marine Services (LSE: GMS) fell after the company published its results this morning, but have since recovered to trade unchanged.

The firm’s half-year figures were certainly a mixed bag. Revenue of $56.1m was ahead of the $54.4m recorded during the second half of 2017. Gross profit was also higher, at $21.3m versus $16.8m during H2 2017.

This improvement has been driven by a number of new contracts. These have improved fleet utilisation from 61% at the end of 2017, to 72% at the end of June.

What could go wrong?

The big problem for shareholders is that 2019 could be a difficult year. Gulf Marine’s net debt was $409.9m at the end of June. That’s equivalent to about seven times 2018 forecast EBITDA. I’d normally look for a net debt/EBITDA multiple of no more than 2.5x for a business of this kind.

Sure enough, the company warned today that it could breach its debt covenants at the end of 2018, if new contract wins don’t come quickly enough.

This could be serious

Because market conditions are improving, I suspect Gulf Marine’s banks would be prepared to take a relaxed view if this happens. But there’s no guarantee of this. The firm could be forced to raise some fresh cash from shareholders to kick-start debt reduction.

At 44p, the shares are currently trading at a discount of more than 50% to their book value of 92p. These shares could rise rapidly if trading improves. But I’m not going to invest just yet.

Debt problems can be very costly for equity investors. For this reason, I’m going to avoid this stock until we get clear evidence that Gulf Marine is profitable and actively repaying debt.

The post Why this small-cap stock could trash the Sirius Minerals share price appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

But I’ve also held the conviction that prices above $75 were what it would take to start oil company shares moving upwards again, and that’s what seems to be happening. Shares in BP (LSE: BP) have gained 23% since the end of March, while the FTSE 100 is up 12%. And the gains have been across the board, with Royal Dutch Shell up 15% — and Premier Oil shares have shot up 70%!

At around 560p today, will it be long before BP shares break the 600p barrier? I don’t think so.

For one thing, BP has steadfastly stuck to paying its dividends during the oil price crisis, with chief executive Bob Dudley insisting that the business would recover, even though we were surely in for a few years of cheap oil.

BP’s consistent dividend provided a yield of 5.7% last year, though the same in cash terms yielded as much as 7.7% back in 2015. If you’d been prescient enough to see that oil prices would surely recover and that BP would continue to be a nicely profitable company, just think what a difference to your pension pot it could have made if you’d locked in a yield like that for the long term — and congratulations if you did just that.

Even though the share price has perked up lately, BP’s forecast dividend still stands at around 5%, and that’s still a good deal better than average. For the yield to come down to what I’d think of as sustainable long-term level of round 4%, we’d be looking at a share price of 750p. 

First-quarter results show that BP’s earnings are recovering nicely and as soon as we get back to dividend rises, I can see the share price soaring.

Picks and shovels

This brings me to an old “picks and shovels” favourite in the oil business, one that provides services to the oil explorers working at the sharp end.

I’m talking about Gulf Marine Services (LSE: GMS), whose share price has also ticked up of late. We’re looking at a 31% rise since a low point in early April, though there’s still some way to go before the 33% drop of the past 12 months can be clawed back.

Gulf Marine shares have struggled more than I anticipated as the period of cheap oil has lengthened, and a profit warning in August last year sent the price tumbling. But are we looking at good value now?

Analysts are forecasting a massive recovery in earnings. Admittedly it’s from a low base, as EPS collapsed to almost nothing in 2017. But if these predictions prove accurate, we’d be looking at a forward P/E multiple for 2019 of only seven — and maybe even the first signs of a returning dividend.

The big concern for me is debt, which stood at $398m at 30 April. That’s almost twice the company’s market capitalisation, and the big challenge in the next couple of years will be to get that down substantially. But if Gulf can remain afloat and achieve its expectations, we could be on to a decent recovery candidate.

The post How soon could the BP share price smash through 600p? appeared first on The Twelfth Magpie.

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Alan Oscroft owns shares of Premier Oil. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A safe 8% yield?

It’s hard to ignore the 8% dividend yield that’s on offer at British Gas owner Centrica (LSE: CNA). City forecasts show that shareholders are expected to receive a payout of 11.7p per share this year, giving a prospective yield of 8.7%.

One of the reasons I own Centrica shares is for this high yield. Normally such a high figure would be a sure sign that the payout was likely to be cut. But I think this could be an exception.

The energy group’s 2017 results showed that dividend cover by adjusted earnings had slipped to a wafer-thin 1.05 times. Despite this, Centrica’s management was able to maintain the dividend and reduce net debt from £3,473m to £2,596m.

This strong cash generation is expected to continue. Management is targeting adjusted operating cash flow of £2.1bn to £2.3bn each year until 2020. Capital spending will be limited to £1.2bn each year.

If the company can deliver on this guidance, then I believe its operations should generate enough free cash flow to maintain the dividend. And with the shares trading at a 15-year low and on a forecast P/E of 10, I rate Centrica as a long-term buy.

A small-cap turnaround

Centrica still has exposure to oil and gas production through its shared ownership of Spirit Energy. But if you’re looking for turnaround investments in the oil and gas sector, then there are probably better choices elsewhere.

One option is offshore support vessel provider Gulf Marine Services (LSE: GMS). This firm has a modern fleet of self-propelled, self-elevating support vessels — ships which can sail into position and then lower their legs onto the seabed, providing a platform for drilling or other oil and renewable work.

Demand for these vessels crashed during the oil market slump. Unfortunately Gulf Marine’s debt levels peaked at this time, as it was nearing the end of a major project to upgrade its fleet.

Things are still tight, but today’s results suggest to me that the group will probably manage to stay afloat without requiring emergency funding.

Trading at a deep discount

Changes made to the group’s borrowing arrangements enabled the firm to reduce its net debt from $402.1m to $372.8m last year. Loan repayments due in 2018 and 2019 have been reduced by two-thirds, and some of the group’s lending covenants have been relaxed.

Last year’s financial results suggest that the bank’s support was badly needed. Revenue fell by 37% to $112.9m in 2017, while the group’s adjusted net profit fell by 90% to $4.8m. Utilisation of the group’s fleet fell from 70% to 61%.

However, Gulf secured three new long-term contracts in 2017 and has already agreed one contract extension in 2018. Management reported “increasing levels of enquiries and tender activity in the Middle East and Europe”.

The stock currently trades at a discount of more than 50% to its tangible net asset value of 86p. Analysts covering the company expect adjusted net profit to rise from $4.8m to $26.3m this year, putting the stock on a forecast P/E of 7.1.

I’d rate the shares as a speculative recovery buy.

The post One small-cap turnaround stock I’d consider with 8% yielder Centrica plc appeared first on The Twelfth Magpie.

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Roland Head owns shares of Centrica. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

One place to look for growth is in among turnaround stocks which have been suffering from any sort of cyclical downturn. And one of those that has caught my eye for a while is Gulf Marine Services (LSE: GMS).

Gulf is a company that supplies services to the offshore oil and gas industry, in the form of providing self-propelled, self-elevating support vessels. And with the oil price slump leading many producers to cut back on capital investment and operating costs, the company has been suffering — the shares have lost 60% in the past five years, to 52p.

But after a trading update in August led to a fresh dip, the price has been picking up again — and though September’s interim results made for superficially grim reading, an operational Tuesday hints at the beginnings of a new optimism.

Improving demand

Tender levels for all of the firm’s vessel classes are said to be “improving in the oil and gas sector in the Middle East,” although timing of contract awards looks like it might still be erratic for a while.

Utilisation levels for Gulf’s large and mid-size vessels is up to 74%, which is encouraging, though debt still troubles me — at £381.3m at 31 October, it needs to come down for confidence to strengthen some more, I think.

The full year is still expected to be tough, with trading in line with expectations. But a big earnings turnaround forecast for next year would see the P/E drop to under 12. If that comes off, I think we could easily be looking back on 2017 as a very good year to buy Gulf Marine Services.

All-out growth

Focusrite (LSE: TUNE) looks more of an out-and-out growth candidate, having seen its earnings per share rising strongly since flotation on AIM in December 2014. And over the same period, the shares have more than doubled to today’s 303p. 

But with a more modest year forecast for 2018 and the share price flattening off a little, we could be looking at a buying opportunity.

The music and audio products supplier has just revealed a 33.5% rise in pre-tax profit to £9.5m, accompanied by a 30% rise in diluted earnings per share to 14.8p.

The dividend for the year has been hiked by 38% to 2.7p per share, and though that’s a yield of only around 1%, it highlights for me a key attraction of the company — it’s highly cash generative. Focusrite ended the year with net cash of £14.2m on the books, way up from the £5.6m it had a year previously — I’m not surprised my colleague Paul Summers recently described the company as having “many of the hallmarks of a quality business.”

Use of cash

CEO Tim Carroll told us that “since the year end, revenue and cash have both grown further,” adding that the company’s “solid momentum has continued into the current year.”

Forecasts suggest a forward P/E of around 21, but I see the analysts’ projections as being too conservative at this stage. The firm tells us it is targeting a dividend cover of four to five times in order to focus on future growth, and it looks to be targeting its cash in the right way to me.

I’m usually wary of early growth stories, but I do like the look of Focusrite at this stage.

The post Two growth stocks I’d buy and hold for the next decade appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Today’s interim results from Judges Scientific (LSE: JDG) show that the firm has staged quite a comeback from the doldrums it found itself in 12 months ago.

It aims to acquire and develop scientific instrument businesses and today’s figures are impressive. Revenues elevated 20% compared to a year ago, and adjusted basic earnings per share surged back by just over 65%. The directors displayed their ongoing confidence in the outlook by pushing up the interim dividend by 11%, and the payout will be covered a comfortable five-and-a-half times by adjusted earnings.

Well-balanced progress

The financial recovery looks well-balanced. Cash from operations gushed more than 80% higher and the cash balance put on 48% to almost £9m helping to push net debt down by almost 44% to £5.8m. The balance sheet is in good shape with total borrowings running around twice the level of last year’s operating profit.

Around 14% of the revenue increase came from organic growth, which proves the company is not ‘manufacturing’ its progress with expensive acquisitions alone. However, buying other businesses, building them up and harvesting the added value is central to the firm’s strategy. So it’s encouraging to see the announcement of two post-period deals with the acquisition of Oxford Cryosystems for £4.5m and an increase in the firm’s share of Bordeaux from 51% to 75.5% costing £1.3m. Judges Scientific is putting some of its money to work by doing more of what it does best.

Strong order book

A strong order book makes the directors confident that full-year expectations will be achieved. City analysts expect earnings to elevate 30% this year and 16% during 2018, which looks like a decent rate of growth. At today’s 1,995p share price, the forward price-to-earnings (P/E) ratio sits just below 16 for 2018 and the forward dividend yield at almost 1.7%. I don’t think the valuation is excessive and I reckon we can expect a lot more from Judges Scientific.

Meanwhile, Gulf Marine Services (LSE: GMS) demonstrates with its interim results today that it is in an earlier stage of turnaround than we are seeing with Judges scientific.

The firm operates a fleet of self-propelled and self-elevating support vessels (SESVs) and the downturn in the oil and gas services industry sent earnings and the share price into decline over the past few years.

The carnage is evident in today’s results, which show revenue tumbling 47% compared to a year ago and adjusted diluted earnings per share plunging by 78%. The directors decided to preserve cash and axed the interim dividend completely – grim! Yet City analysts are optimistic that a recovery is around the corner and forecast a rebound in earnings for 2018.

High borrowings but…

There’s no doubt that borrowings are high at around £308m, which is almost twice the market capitalisation, but the tangible asset figure more than backs the debt. Ongoing cost-control measures and progress with new contracts should help the firm to keep up with interest payments. The directors reckon a secured backlog of work runs at £143m or so and tender activity in Europe and parts of the Middle East is good.

The share price hasn’t moved much today, suggesting the bad news is already in the price and the market has its eye on the future. I think ‘right now’ looks like a good time to run your slide rule over the firm.

The post 2 turnaround small-cap stocks with big potential appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Judges Scientific. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In this piece I’m going to look at the investment case for two potential value buys.

Will boardroom clearout lift shares?

Gold production at Russia-focused miner Petropavlovsk (LSE: POG) rose by 19% to 232,400 ounces during the first half of 2017. According to the group’s half-year trading update, full-year production guidance remains unchanged at 420,000 to 460,000 ounces.

The group’s share price has also remained unchanged following today’s update. But the company’s boardroom has seen big changes recently. Founder Peter Hambro has been ousted from the chairman’s position and demoted to non-executive director.

And his longstanding business partner Pavel Maslovskiy announced on Monday that he has resigned from his role as chief executive.

Petropavlovsk survived a debt-fuelled crisis in 2014/15 by persuading shareholders to back a major refinancing deal. But some shareholders have been disappointed by the firm’s decision to fund expansion projects rather than focusing on debt reduction.

Management said today that net debt has fallen by 5% to $570m (£438m) over the last six months. That’s still very high, in my view, given that the group’s market cap is just £231m, and 2017 net profit is expected to be just £35.7m.

The shares currently trade on a forecast P/E of about 3.5, and at a 50% discount to their book value of about 12p per share. I believe there should be an opportunity here, but I’m concerned by management’s focus on expansion and the slow pace of debt reduction. In my view, there are better buys elsewhere in the gold mining sector.

The right time to buy?

Gulf Marine Services (LSE: GMS) has a new and modern fleet of jack-up rigs of the kind used by the offshore oil and gas sector. The problem is that rental demand is fairly weak at the moment. This could make it difficult for the firm to service and repay its net debt of $370m.

To put these borrowings in context, $370m is more than two years’ revenue at current levels, and eight times 2018 forecast profits of £44m.

At the current price of 55p, Gulf Marine stock trades at a 44% discount to the firm’s book value of 98p per share. That discount represents a potential opportunity, as the firm’s fleet build-out programme is now complete. Spending should fall sharply, providing surplus cash to reduce debt levels.

Analysts also expect the firm’s profits to rise significantly over the next year. The group is expected to report adjusted earnings of 6.8 cents per share for 2017, rising by 83% to 12 cents per share in 2018. This puts the stock on a 2017 forecast P/E of 10.8, falling to a P/E of 5.9 for 2018.

If oil market conditions become more favourable in 2018 — as I suspect they might — then Gulf Marine Services could be a profitable buy at current levels. But I’d only want to hold this share as part of a diversified portfolio. In my view, the level of debt involved mean that this stock is still quite risky for equity investors.

The post 2 deep value stocks trading at big discounts appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The collapse of the oil price between mid 2014 and early 2016 put paid to investor interest in a number of stocks that had previously been considered to have outstanding growth potential.

I’ve had my eye on a couple of these forgotten favourites and I reckon the risk/reward outlook for investors at today’s prices is better than it’s ever been.

Scope to re-rate higher

Shares of Gulf Marine Services (LSE: GMS) were trading above 150p before the oil price went into freefall. They reached a low of around 30p in the darkest days but have since recovered to 56p. I believe they have a lot further to go, as the market refocuses on the growth prospects of the business.

GMS is the world’s leading provider of advanced self-propelled self-elevating support vessels serving the offshore oil, gas and renewable energy sectors. Despite the challenging conditions over the last few years, it continued to make a profit, invest for the future and pay a dividend (running yield of 2.9% at the current share price). It was also able to secure a new $620m debt facility on attractive terms, demonstrating the banking community’s confidence in its business model and prospects.

The company is seeing increasing tender activity and vessel utilisation and in a recent trading update said it had a contracts book of $251m at 1 May, compared with $175m at 31 December. Net debt at 1 May stood at $362m — relatively high compared with a market capitalisation of £196m — but management said deleveraging is progressing as planned and the year-end number is expected to reduce to $335m.

GMS trades on a current-year forecast price-to-earnings (P/E) ratio of 10.4, falling to just 5.7 next year. As such, the stock has scope to re-rate considerably higher from its current level and I believe now could be a great time to buy a slice of this business.

Better placed than ever

UK onshore producer and explorer IGAS Energy (LSE: IGAS) suffered a more torrid time than GMS during the oil rout. Indeed, it came within an inch of its life as profits turned to losses and its debt-loaded balance sheet threatened to sink it.

Management — which included a new chief executive — did a remarkable job of saving the business through a capital restructuring, albeit at huge cost to the existing investors. The painful process was completed with a share consolidation earlier this month, which means that the current share price of 73p is equivalent to 3.7p in ‘old money’.

IGAS represents an attractive proposition for new investors today. Net debt is $8m, compared with $122m at 31 December 2016. The company is cash flow generative at current oil prices and its shale development plan is well funded by its partners with a carried work programme of up to $230m.

Now on a considerably firmer financial footing, IGAS looks better placed than ever to become a leading player in the nascent UK shale gas industry. I consider this a more speculative ‘buy’ than GMS but with a current market cap of £89m the rewards for investors could be substantial.

The post 2 forgotten growth stocks with massive potential appeared first on The Twelfth Magpie.

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• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Shares of sausage casing maker Devro (LSE: DVO) are down roughly 35% in the past year as the company’s ambitious expansion plans went off the rails and debt levels came dangerously close to breaching banking covenants. But with both of its new factories fully operational, and cash flow higher, I think now could be a great time for investors to take a closer look at the stock.

A steady competitive advantage

One of the main reasons I like the business is that the global market for sausage casings is quite attractive from an investing point of view. Global demand is steadily growing at 2%-4% and there is only a handful of competitors making the more reliable and higher margin collagen casings that Devro produces. This gives the company a steady competitive advantage.

Looking ahead, Devro will also be gaining a leg up, as its two brand new factories in the USA and China are now producing products at much lower cost than the decades-old factories they replaced. While there were teething issues with unexpected cost overruns and problems producing the correct products these issues are being worked out.

Furthermore, the company’s debt should now be less of a problem. With factory investments completed capital expenditure will be falling , and operating costs are set to fall due to the more automated factories. Cash flow is still impressive with underlying operating cash flow of £64m in 2016 on £241m in revenue. Net debt of £156m, or 2.7 times EBITDA, remains high but is still below covenant limits of 3x EBITDA, and should decrease in the coming quarters.

Devro has had its troubles in the past year, but with an attractive competitive environment, a management team with a long history of increasing sales, and profits still strong I think the company is primed for a successful turnaround. Add in a low valuation of 13.6 times forward earnings and a 4.7% yielding dividend and now could be a great time to begin a position.

To good to be true?

A potential bargain option for the more risk-hungry investor may be maker and operator of offshore oil & gas platform support vessels Gulf Marine Services (LSE: GMS). Shares of the company have collapsed by more than 45% over the past two years, thanks to a major fleet expansion that was completed just as oil prices collapsed on 2014.

Hindsight being what it is, this expansion looks to have been poorly timed, as it left the company with a whopping $362m in net debt at the end of 2016. This is a not insignificant sum for a company whose revenue in the same year was only $179.4m.

The good news is that once ships are in service GMS’s EBITDA margins are a very substantial 60%. This means adjusted EBITDA last year was a full $106.8m and left net debt a high, but manageable, 3.4 times EBITDA — its debt covenants allow a maximum of 5x. And with the new-build programme complete the company expects net debt to peak at around $375m in Q1 and fall quickly to around $335m at year-end.

The company’s ability to successfully execute this debt reduction plan will depend on keeping fleet utilisation rates at or above their current 70%. If GMS’s mainly Middle Eastern customers continue to pump oil at prodigious rates they may be able to pull this off. That would mean investors could find the firm’s shares a bargain at their current valuation of only 7 times forward earnings.

The post 2 bargain turnaround stocks with huge potential appeared first on The Twelfth Magpie.

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• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Devro. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

One share trading at a bargain basement 5.6 times forward earnings that has caught my eye is Middle Eastern oil & gas vessel operator Gulf Marine Services (LSE: GMS). AIM-listed GMS builds, owns and operates a fleet of support vessels that anchor next to oil & gas platforms allowing workers to build, operate and decommission platforms in up to 80m of water.

Why are shares so cheap? There’s the expected and obvious answer of low oil & gas prices, but the larger issue is that GMS also has to contend with an expected $395m of year-end net debt that dwarfs the company’s £170m market cap.

Scary… or not?

This is a frightening statistic, but I believe the actual situation is better than it appears on the surface. First off, this debt doesn’t come due until 2021, giving it plenty of time to recover. Second, 70% of the revenue GMS receives is from opex activities rather than capex, which means a fairly reliable revenue stream over the long term. In addition, this debt pile is due to peak at year-end and then begin falling as the company’s ambitious new fleet expansion finishes in Q4 of 2016.

Furthermore, its business is relatively high margin and kicks off considerable cash. In H1 of 2016 operations generated $63.9m of cash from $110m of revenue. Now, if this is to continue GMS will need to see oil prices rise so that soon-to-expire contract are renewed. Thankfully, we’re seeing this as shares rocketed over 17% on Tuesday after the company disclosed a new contract win and a two-thirds rise in order backlog since November. While GMS has plenty of upside there are undoubtedly also high risks, but I reckon hardy contrarian investors may find the company worth a closer look in 2017.

Another share I find intriguing in the New Year is Middle Eastern oil services provider Petrofac (LSE: PFC). Its shares trade hands at 11.6 times forward earnings while also offering a 6% dividend yield. Like GMS, I’m attracted to it because it offers much of the upside of exposure to the oil & gas industry while removing much of the downside through reliable contracts from Middle Eastern national oil companies. Providing services that are always needed and bring fairly high margins means it also generates significant cash from operations, in this case $205m in H1 2016.

Now, Petrofac shares are unlikely to skyrocket any time soon unless oil prices also make considerable headway and drag margins back to their pre-crash levels. However, with only $900m of net debt, strong cash generation and a steady backlog of orders providing revenue visibility for years to come, I view it as a solid income option trading at a decent valuation.

The post 2 bargain-basement shares to kick off 2017 appeared first on The Twelfth Magpie.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longer-term shareholders will probably be forced to exit this investment at a loss. The bid price of 165p per share represents a 10% discount to Brammer’s share price at the start of 2016, and a 41% discount to the stock’s value two years ago.

Without today’s bid, it seems as though Brammer’s shareholders would have been asked for some fresh cash. In today’s statement, the board said that they believed a turnaround would take “at least three years” and incur “significant cash reorganisation costs”.

In this article, I’m going to consider the outlook for two other firms that I believe have takeover potential.

Are jacked-up profits likely?

AIM-listed Gulf Marine Services (LSE: GMS) runs a rental fleet of self-propelled jack-up support vessels, serving the offshore energy industry. The firm’s fleet is new and modern, and should be attractive to potential customers.

The problem is that Gulf Marine’s fleet expansion has coincided with the oil crash. Customer demand is soft and hire rates have fallen. But because the company’s new vessels were funded with borrowed cash, Gulf Marine expects to end the year with peak net of $395m.

After-tax profits are expected to fall by 52% to $43.4m this year. A further 32% decline to $33.5m is expected next year. I believe there’s still a reasonable chance that Gulf Marine’s debts could force the firm into a rights issue or placing.

However, the oil and gas market will eventually rebound. In the meantime, Gulf Marine’s low valuation means that the firm’s enterprise value (market cap plus net debt) of £493m is significantly less than the £675m value of its fixed assets. A potential buyer could pay a 50% premium for Gulf Marine’s stock, and still buy the company’s assets at less than their book price.

This stock could be cheap

Component manufacturer Essentra (LSE: ESNT) issued its second profit warning of the year on Tuesday. The group is seeing slower growth than expected, across many of its operations.

Earnings forecasts for the current year have now been cut by about 30% since the start of 2016. The share price has fallen by 54%. Essentra shares now trade on a forecast P/E of just 9.5, with a prospective dividend yield of 5.4%.

This dividend looks safe for this year. But debt levels have risen as a result of dividend payments and the weaker value of the pound. Net debt was £433.9m at the end of June, giving the group a net debt to EBITDA ratio of 2.2x. If this rises much further, the dividend could be at risk.

Essentra’s new chief executive, Paul Forman, will take charge of the firm in the New Year. In my view, Mr Forman’s top priorities should be cutting costs to restore the group’s falling profit margins, and reducing debt.

Mr Forman may pull off a stunning turnaround, and could attract a trade buyer. But the firm’s problems may also turn out to be worse than expected. That’s why I’m going to remain a spectator, until we learn more about trading in the New Year.

The post Brammer plc is bailed out with a cash offer: Will these companies be next? appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Essentra. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.