European Small-Cap Poised to Pop
Jan. 4, 2019 8:00 p.m. ET
Photograph by Prayitno
Looking for a contrarian share? How about a small-cap hit hard by a double whammy: the recent drop in oil prices and Europe’s yearlong economic and geopolitical woes.
The company is Fugro (ticker: FUR.Netherlands), which has a market valuation of 742 million euros ($848 million). The loss-making Dutch outfit analyzes undersea data for oil companies exploring for new fields or measuring the oil left in existing fields. It also scrutinizes data for construction projects on seabeds, such as wind farms, and on riverbeds, such as bridges. And it can assess seismic data for land-based construction projects.
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Fugro shares have fallen more than 80%, to €7.95 euros ($9.06), since April 1, 2014, largely because investors see the company’s fortunes tied to oil prices, which fell 53% during the same period. Europe’s headwinds—ranging from Brexit to Italian and French politics—have hurt, too. Fugro’s revenue fell in recent years as oil-and-gas companies invested heavily in shale oil fields onshore, so they weren’t using as much of Fugro’s key undersea data products.
“The perception is that we are an oil-and-gas services company, but we are a diversified geodata provider,” says Edward Legierse, Fugro’s director of corporate strategy and communication. The shares have also been “depressed by people pulling money out of euro stocks,” says Thijs Hovers, a portfolio manager at Lucerne Capital, a Europe-focused hedge fund in Greenwich, Conn.
Fugro is a favorite of his firm. He thinks the stock could easily double over the next two years as demand returns.
The business is more resilient than other oil-services companies because it serves oil-and-gas companies in the early phase of exploration for new reserves offshore. It’s not dependent on subsequent production or sale, and its other, smaller operations tied to renewable energy and infrastructure development are growing fast. Demand for its undersea data-analysis services is growing again because its clients have found that shale oil, which is drilled on land, is too expensive to produce at oil prices around $50 a barrel. But offshore oil rigs can turn a profit at $30 a barrel. Oil companies invested $176 billion in 115 deep-sea exploration-and-production projects in 2018, up from just $67 billion in 92 projects in 2016. Fugro ranks No. 1 or No. 2 in all of its markets.
Fugro is expected to post an annual net profit of €44 million for the year through Dec. 31, 2019, swinging from an expected loss of €13 million for 2018. By 2020, net profit is forecast to rise to €82 million, equating to €1 in earnings per share, according to Quirijn Mulder, an analyst at ING in Amsterdam.
Analysts Luuk van Beek of Bank Degroof Petercam, Henk Veerman of Kempen & Co., and ING’s Mulder have Buy ratings on Fugro, and the lowest price target—from Mulder—is €15.10. That’s roughly twice the current price.
Among the risks are that, if Fugro’s earnings falter, the company will struggle with debt, which is about three times the industry average and equivalent to 2.5 times earnings before interest, tax, depreciation, and amortization. None of the debt matures until 2020. ING’s Mulder says the debt will be more manageable once Fugro becomes profitable this year. Legierse declined to comment, citing a current “quiet period.” Another risk is European politics, which helped push the Stoxx Europe 600 Index down 13.35% last year.
Still, Kempen’s Veerman expects spending on offshore oil projects to grow by about 10% a year for the next five years. A bet on Fugro is a wager that its fortunes rely more on a deep-sea renaissance than nervous European investors.