Thalassa Holdings – April 2018

Thalassa Holdings – LON:THAL
Share Price – £0.85
Market cap – £16.5m

Introduction

Awhile back, I wrote about Thalassa Holdings when it trading at a significant discount to tangible book value. Unfortunately, I passed upon the opportunity to buy shares, only to see it go from £0.43 to £0.85 today. With their annual report due any day now, I thought I would take another look to see if I was still missing a trick. For extra background on Thalassa, I would recommend that you go back and review my previous post.

Transformation

When I wrote about Thalassa over a year and a half ago, their only revenue generating asset was the wholly owned WGP subsidiary, a business that provided deep sea seismic exploration services to the oil and gas industry. It also owned a non-revenue generating start-up developing autonomous robots to operate in the seismic exploration area, and also held an insignificant stake in Papua Mining PLC, a London-listed exploration miner nano-cap.

Since then, it’s been all change at Thalassa.

  • The WGP subsidiary was sold for $30m. $20m if which has been received with a further $10m subject to the business generating certain contracts (and not yet received).
  • A 20% stake in the autonomous robot start-up was sold to the same company for $2m with what looks like a two year option to acquire another 20% for an additional $2m. This sale was supposed to concluded by March 31st 2018, but we have heard no confirmation since.
  • A 25.2% stake (as of time of writing) has been acquired in the London-listed company, The Local Shopping REIT (LON:LSR).
  • The disposal of the entire stake of Papua Mining (LON:PML).

Essentially, in order to value the business, I am back to square one. Luckily, there are not a lot of moving parts here.

Sum of the Parts

  • Cash – £14.5m (as of the December 31st 2017 number and converted to GBP at today’s rate)
  • The Local Shopping REIT 25.2% stake – £6.5m
  • ARL (Autonomous Robots) 80% stake – £5.7m
  • Other – £0.5m

Total NAV – £27.2m

Using the end of year 2017 share count, the company currently trades at a discount to tangible NAV of 38%.

But it actually is even better than that again. Since the 31st of December 2017, the company has been buying back stock at below NAV.

  • 90,000 shares bought for £0.92
  • 75,000 shares bought for £0.8175
  • 92,865 shares bought for £0.847
  • 25,000 shares bought for £0.85
  • 30,000 shares bought for £0.85
  • 25,000 shares bought for £0.85

The cash balance can be deducted by £290k based on these purchases, which gives us a more update NAV of £26.91m. The share count not in treasury has subsequently been reduced to 19,474,775. That gives us a current NAV per share of £1.38. Note, that Thalassa have been active buying back stock even as of the day I write this. Further purchases of share below NAV will naturally generate value to shareholders, assuming the NAV can be relied upon.

Free Option

It could actually be better than that again.

As I stated above, when the WGP subsidiary was sold, Thalassa received $20m at the closing of the deal. What is not accounted for in the NAV number, is the extra $10m that the company could receive if certain customer contracts are entered into within the next five years. I don’t know how likely it is that the company can earn the full $10m, or even part of it. This might be something worth following up with management on.

Secondly, the $2m that is due to be received for the 20% stake in ARL does not appear to be counted as a receivable, or in the cash pile either. Between that $2m, and the possible extra $10m that the company could earn, you have a potential boost to NAV of $12m (or £8.6m). If we were to take the £8.6m as a given, potentially the NAV could be as high as high as £1.82. If the company was to recoup only half that amount, the NAV would still be £1.60, which is almost double where the current share price trades today.

There is also another small option in the value of The Local Shopping REIT shares that the company owns. LSR is a company that I have studied recently (but not covered here) which I feel is interesting. It is a REIT that is currently trading at below NAV and is in liquidation. The current share price is £0.316 while NAV is £0.42. From my analysis, and based upon the current rate of disposals and discounts applied, I thought that a £0.36-£0.38 was not an unreasonable range of a return that could be realised from this investment.  That would bump Thalassa’s NAV up by an extra £1m-£1.5m.

 

Risks

  • The ARL deal could be in jeopardy. Also given the nature this is a start-up, it is  entirely possible that this could suffer a catastrophic failure and be worthless.
  • Administrative expenses should be a concern for a company with a relatively small asset base and no revenues. What is the run-rate here now that WGP has been sold?

Conclusion

I like that this company is already at a discount to NAV, but yet the possibility for further growth to NAV. I also like the repurchasing of shares at below NAV. Duncan Soukup knows these assets best, and his track record has been very good, so I would be quite encouraged that he is active in buying back shares. However, I feel there is still a bit of uncertainty here regarding ARL and the run-rate of administrative expenses going forward. For now, I will be holding back on a decision with this company until I can read the most recent annual report, which should be due shortly.

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