Thalassa Holdings – September 2016

Thalassa Holdings – LON:THAL
Share Price – £0.39
Market cap – £8.94m

Introduction

Thalassa Holdings has been a company that has been on my radar for quite some time. The company provides life of field and seismic surveying services to other companies in the oil and gas sector. Back in 2013 and on the back of $100+ oil, demand for its services sent the share price soaring from about £0.50 to £3. As the oil price came crashing back down, Thalassa’s major customers drastically cut back on expenditure, sending the share price to an average price of about £0.40. At this point, the company started to look interesting to me. Trading at below tangible book, while not losing too much money, it looked (and stills looks) like a company that should come through the current crisis in the oil and gas industry.

Duncan Soukup

Ordinarily, I would steer clear of nano-cap companies in the oil and gas space. Typically, with these types of company, you have management with very little skin in the game with regard to personal shareholdings. Inevitably, they end up filling their own pockets through inflated salaries and expenses. When the company coffers run dry, they can simply raise more capital, keeping their jobs, while wiping out existing shareholders so the cycle can begin again. At Thalassa, the situation is a little different.

As I already outlined, a significant margin of safety exists for Thalassa on the balance sheet and through earnings of their core oil and gas services business. With regard to management, another less tangible margin of safety exists in Duncan Soukup. The Telegraph did a piece on Soukup many years ago that provides background on him. I won’t duplicate what it said, the crux of it is that he’s an activist investor who isn’t afraid of a fight. When you combine that, with his shareholder letters, it’s clear that he’s someone with a long background in investing who should understand how to provide the best returns for shareholders. With a large personal shareholding, logic states that he will try to maximise shareholder value, rather than engaging in self-serving behaviour.

Jury’s Out

Thalassa have continued to buy back stock throughout the year at well below tangible book. According to my figures, 1.13M shares were bought back this year at a total cost of £536.6K and an average cost of £0.475. Based on the current share count (excluding shares held in treasury), that gives us a current tangible book value of £0.86 as opposed to book value of just £0.79 as of 2015 year-end numbers. Credit has to be given to Soukup on this, the share buy back has created serious value for shareholders.

On the other hand, a few things have caused me to raise eyebrows with this company, including a rather big announcement that came out today.

  • The first was back in 2012 when Thalassa acquired shares in a public company called Rock Solid Images that worked in a related field that was de-listing from AIM. The company was struggling, and despite knowing the company was going dark, Soukup put out a tender offer for shares. We don’t know specifically what happened to the company, but the investment was written off according to the 2014 annual report.
  • Not so much of a red flag, but something to be aware of, Soukup moved the premises of the company from Cornwall to Wiltshire. It was only later that the company eventually disclosed the fact that the new premises in Wiltshire was actually owned by Soukup. The company did provide further justification on the move. I am fine with the decision, just a little nervous at why the company wasn’t upfront about it earlier.
  • The holding of the annual meeting in France. While this is suitable for Soukup (who lives just down the road from where the meeting is usually held), it makes it look like the company is trying to dissuade attendance.
  • In 2014, the company spent £1.9M acquiring the assets of Go Science, a start-up that was working in the autonomous underwater drone area. This asset was listed on the books as intellectual property, but was written off shortly afterwards. As of 2015, it is at the prototype development stage.
  • The latest acquisition is a proposal to take a £400k stake in an copper exploration company called Papua Mining (LON:PML). This company has a current market cap of £1.45M, very little cash and whose only asset is exploration licences in Papua New Guinea that have yielded nothing in the way of commercial grade deposits of copper. Based on current expenditure, the £400k Thalassa investment (combined with £800k from others) might be enough to keep the company on life support for another year.

Final Thoughts

Thalassa have a pretty decent core business that looks to be back to moderate profitability even in the bad oil & gas environment that we’re in now. The balance sheet is extremely healthy and the stock buybacks have delivered real value to shareholders. What’s less promising is the corporate governance issues and the speculative nature of Soukup’s capital allocation. I don’t know anything about copper mining in Papua New Guinea, but the latest acquisition looks nothing more than an expensive lottery ticket. Having said that, it does look like the market has overreacted slightly to the news. 1.75p of cash is being used to fund the acquisition, whereas the share price has fallen by over double that, down 3.75p today.

For now while I will continue to monitor Thalassa, but will not be buying shares.

3 thoughts on “Thalassa Holdings – September 2016

  1. Mike

    Very interesting and perceptive comment on THAL. What do you make of todays announcement of their investment in a REIT, at a 35% discount to NAV, which is in the process of being liquidated?

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    1. admin Post author

      Thanks for the comment.

      If Mr. Soukup stuck to making acquisitions like the one he made today, then I would be a shareholder in an instant. Using his own book value that is discounted by half to buy stock in another company that is discounted 30% to NAV is a road to riches, assuming something like that NAV value of the REIT can be recognised.

      Stock cost – £3.6M
      NAV value – £4.68M

      If we can get the full value of NAV recognised, then Thalassa can make close to £1M from this. This is a serious gain for a company like Thalassa that has a valuation of just £9.2M.

      If Soukup can keep doing this, then there’s no reason for investors to value the company at a discount to half the book value. The other nice thing about this is that he will own 10%+ of LSR, he can take a seat on the board and ensure that Thalassa’s interest is protected.

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  2. admin Post author

    Thalassa announced 2016 mid-year results and they were not good with revenue being cut in half, and the company now barely profitable. What’s worse is that things aren’t getting better anytime soon according to Soukup’s commentary (which is a must-read if you have any interest in O&G).

    “Whilst we might be trundling along the bottom or near the bottom of the oil price curve, we are unlikely, in our opinion, to see any sustained recovery until mid-2017.”

    http://thalassaholdingsltd.com/documents/NP0916-2204_Interim-Report_P02_CLN.pdf

    The decline of Thalassa’s core oil and gas services business explains why Soukup has been so eager to invest Thalassa’s excess capital into areas outside of that sector. Regardless of what I think about copper exploration in New Guinea, the company is cheap on a net asset basis, so I think it’s fair to value a speculative investment like that as a free lottery ticket.

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