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This month we are featuring Oil Equipment and Services Group, Velosi. These shares have already risen from a low of 36 pence in March to 93 pence at the end of June. Given this rise, there must be some scope for a short term correction in the share price. Nonetheless, we still believe that investors may wish to take a closer look here.

In April Velosi issued some very good results which showed that pre tax profits for the year to 31 December 2008 had increased by 30% to $14.9 million and that earnings per share were $US0.22 (14.4 pence). The Group reported net cash at the year end of approximately $18 million and a low level of debt with gearing of 1%. 

Like many shares in the Oil Services sector Velosi’s shares had fallen considerably with the decline in oil price. However, Velosi specialises in inspection and Health Safety and Environment services and much of their work has not been impacted by the falling oil price. In the Final results statement Velosi’s Chairman, John Hogen, explained why the Group was confident about its future:-

‘Despite the significant fall in oil prices precipitated by the global slow down in demand, the outlook for the Group remains positive as it continues to win new long-term contracts both in existing markets and more importantly in new markets such as Angola, Russia, Brunei and Saudi Arabia. Our confidence in the future performance of the Group is derived from the following factors:

• Good demand driven by new projects and the need to maintain existing projects with concerns over safety and the environment making the services Velosi provides a key investment for all major oil and gas companies;
• Excellent forward visibility on future revenue streams with 38% of long-term contracts having more than 3 years to run; 
• Major oil and gas companies increasingly using Velosi as a one-stop centre on a global basis;
• Growth in market share expected to offset any future slowdown in oil and gas expenditure;
• Increasing focus on long-term contract wins in new markets and parts of North Africa and South America over next 12-24 months;
• Strong financial base with excellent cash generation and approximately US$18 million of net cash at the year end (2007: Approximately US$4 million) to support commercial objectives; and
• Balanced approach to future investment taking account of the current environment, and allocating resources to areas only where the Company can achieve significant returns.’

House Broker, Charles Stanley issued forecasts for Velosi at the time of the Final results. These indicate earnings per share of 14.5 pence for the year to 31 December 2009 rising to 15.5 pence in 2010.

What has prompted us to cover Velosi in this month’s AIM Snippet column is the Group’s AGM statement which was issued on 24 June. The statement confirmed that the current year has started well and that the Group is trading in line with expectation as well as announcing three more significant contract wins. It was one of these contracts which caught our eye. 

The largest of the contract wins, potentially, is a 5 year contract to provide quality and inspection services to Eskom, South Africa’s state owned electricity provider. In the contract Velosi will inspect equipment prior to its shipment to South Africa. The RNS stated that ‘Capital spend on this program is expected to be in excess of US$30 billion and the fees for inspection should be in the region of 3%.’ Thus inspection fees at today’s exchange rate could be worth approximately £540 million.

Not that all of this money is coming Velosi’s way. The company explained in the AGM Statement: ‘The Quality and Inspection services work will be spread out amongst a number of competing inspection authorities and much of the work will take place in Europe. Whilst we are confident of winning our proportion of the work available, there can be no guarantee of the level of fees which Velosi may ultimately achieve over the life of the contract.’ 

We cannot judge how much of the Eskom project will be won by Velosi, but this does seem a very impressive contract for an AIM Company to be getting involved with. Velosi’s market capitalisation is £43 million and the shares trade on a forward p/e of just over 6. We believe the Group is worthy of further investigation.

We suggest that readers interested in Velosi Group take a careful look at the Final results here and the recent AGM statement here. The investors section of Velosi’s website can be accessed here.

One person who was obviously likes Velosi is Garmore Fund manager, Gervais Williams who holds these shares in the Gartmore’s Fledgling Trust. Read about this fund manager’s views on the prospects for small cap shares here.

STOP PRESS: The Express Online has suggested that ‘Traders’ have heard of a 150 pence per share bid for Velosi which has pushed the share price up. We are sceptical of such rumours. Read the Express piece here.

...the outlook for the Group remains positive as it

continues to win new

long-term contracts

‘Capital spend on this

program is expected to

be in excess of

US$30 billion

and the fees for

inspection should be

in the region of 3%.’

Written by Michael Crockett

Copyright Aimzine Ltd

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