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Stop Press 22 June 2007 : PCH Group – share price up 19% on renewed takeover discussions

Trevor Hoey - Following on from this week’s article on PCH Group (see below), the company has today received a fresh approach from Cape Plc. although there is no indication of a proposed offer price.

Setting aside the outcome of these discussions, one reader questioned whether PCH’s record of lumpy earnings would continue following the steps management has taken to diversify its earnings.

Management’s decision to position the company so that income from construction projects in Australia and overseas account for a larger proportion of group revenue should assist in creating a smoother earnings pattern.

That said, the new markets it has entered are also exposed to cyclical trends and issues regarding the timing of contracts. But providing these downtrends don’t coincide with lulls in PCH Group’s energy services business the overall impact of management initiatives should be positive.

Companies
A not so vague PCH back in vogue
Trevor Hoey, 16th June 2007

A glance at PCH Group’s (PCG) share price chart over the last three years would leave most investors thinking it is one of those companies that run on hype rather than results. During that period, PCH’s share price doubled from 35 cents to 70 cents between 2004 and 2005; momentum continued with its share price passing $1 in February 2006. But in the ensuing six months, PCH Group’s share price plummeted to a low of 50 cents.

While PCH Group has recovered most of its losses in the last six months investors must be wondering just what is fair value. Is there more turbulence around the corner, has PCH Group simply benefited from a hot market or is the company a real turnaround story waiting to unfold? PCH is a global provider of services to the oil and gas services, a sector that is performing strongly, so the company is certainly worth considering.

Before casting an eye to the future though it is worth identifying what went wrong in 2005-06. The 2005-06 result was a record year in terms of revenue (up 50 per cent), profit (up 75 per cent) and earnings per share (up 40 per cent). Investors were mainly alarmed by management’s comments earlier in 2006 regarding a weaker 2006-07 result due to the winding down of some large projects, the lead time in terms of upcoming projects and the cost incurred in realigning the business with a view to diversifying its sources of revenue.

While management’s message was accurate, it could be argued that if it had provided a forward looking picture that better illustrated the company’s medium term prospects and the inherent value that the stock represented at the upper end of its trading range, then the sharp decline in its share price could have been tempered.

Interestingly when managing director, Jamie Cullen provided an activity update in May 2006 he stated that management had no control over the share price. With a much greater emphasis on investor presentations, the delivery of live online interviews and participation in industry related seminars it would be fair to assume that the corporate world views the issue of proactive investor relations as an increasingly important responsibility – and that it definitely does influence the share price.

Management made reference to a more positive outlook in April 2007, hot on the heels of an announcement in which the company flagged 13 contracts that had been secured in international markets. Given that there are reasonably long lead times from tendering to the award of contracts, it would be reasonable for investors to question whether this potential pipeline of projects should have been flagged when PCH’s share price was wallowing in the vicinity of 65 cents.

It seems more than coincidental that management’s new found enthusiasm for providing a balanced, but importantly a more positive outlook, occurred at a time when it was attempting to convince shareholders that a potential takeover offer of 90 cents per share did not ‘fairly reflect the value of PCH’s shares.’

Perhaps shareholders who sold down their holdings at around 60 cents just two months prior to management’s upbeat assessment of the company’s value, would have retained their stake, if this information was released earlier. In short, it could be argued that management’s failure to provide a big picture outlook, highlighting the fact that in its opinion PCH was trading at a discount of at least 40 per cent relative to its inherent value, was the underlying reason why some investors incurred a loss.

While management’s role in terms of investor relations may be questioned, there is no argument that the strategic repositioning of PCH has changed the company’s risk profile and opened up new areas for expansion. PCH has broadened its operations in the Australian construction industry where it provides scaffolding, formwork, temporary fencing and hoists. The company has entered the South East Asian and Middle East markets providing similar services.

PCH’s core energy services business is on the cusp of another surge in revenues, as indicated by the April 2007 announcement of two contract wins and two highly significant tenders, one of which is for a record value. These projects and tenders are for the provision of scaffolding and other services to energy companies operating in the Caspian Sea.

This is an area where PCH has established long term client relationships, particularly with the BP consortium, AIOC, that is involved in a $US13 billion development project in the Caspian region. Cullen took the opportunity to highlight that the Caspian region, where PCH has ‘a strong market position’ was experiencing ‘robust conditions that are expected to run well into the next decade.’ It is this type of message that will reinforce shareholders’ confidence in the company.

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Trevor Hoey is one of Australia's leading finance journalists, having written for Shares, Personal Investor and BRW magazines. Trevor's broad contact base enables him to find out - and report on - the real story behind what's happening at Australian listed companies. Trevor writes for the Australian Financial Review and AFR Smart Investor magazine.