Last month I took a look here at Enteq Technologies, following my buying some shares on the back of what appears to be a decent recovery story.
Since then, I have increased my holding following a positive year end trading update to the market, which revealed that revenue is now forecast to be ahead of market expectations.
Following that release, earlier this week I was fortunate enough to enjoy an informative catch up with management, which included CEO Andrew Law along with CFO David Steel.
Enteq, which although effectively UK based, has its primary operation in the US located in Houston, where engineering and mechanical manufacturing related to its Measurement While Drilling (MWD) takes place.
As previously mentioned in my piece from last month, the US is a major market for the company, although it also derives revenues from other geographies.
Having only very recently returned from N. America CFO Steel was happy to expand on what has been happening there and the current prospects, before the CEO himself embarks for a visit in a few weeks.
Steel says that since September they have seen very strong growth in the N. American market and that was before the current awful Ukraine situation. “It’s now almost like we are down to a supply constraint” Steel adds, “ during the downturn, covid and the first half of the year it was quiet, not just for equipment manufacturers such as ourselves but our suppliers too who had also been cutting back. As a result of the activity we are very fortunate, because as a company we have always ensured that we have a relatively high level of inventory on our shelves compared to our turnover and that is one of our USP’s.
If you want a kit next week, we are one of the few people that can do that and fortunately that has paid us back in spades”.
Steel adds that they did have a significant amount of stock, so they benefitted not merely from the upturn in N. America but by the fact that they could be very responsive. “As a result of that, not only have we been able to provide equipment to our regular customers, but to new entrants too”.
The CFO expands that whilst they are not quite at the position of having a massive order book, they have a constant stream of enquires which he describes as being very, very reassuring.
CEO Law, echoes the same note and refers to the recent trend of an increasing rig count across the US and medium to larger sized independent operators looking to increase their market share with new off-shoots starting up in the space as being positives.
Whilst the US is clearly leading the way, this isn’t surprising as Law says that it is usually the first to respond to a downturn, but equally, the first to emerge and progress.
Away from N. America we touch on China, which had been an interesting area for growth prior to the pandemic and general downturn. “China is starting to wake up” says Law, “rather like a bear coming out of hibernation and longer term there is a lot of market and a lot of demand there. It is really a case of when that comes through and although we have put some bits in there, it isn’t back up to its full strength yet”.
Although China has clearly been a difficult environment for NTQ to operate in due to ongoing covid restrictions, Law sounds upbeat on the longer term prospects there and the signs of emerging and increasing activity should bode well moving forward.
In relation to other areas the CEO says, “we have got equipment going into Central Asia and that is really good for us and the Middle East too, which although these areas tend to be slower to respond than the US and are still a bit sluggish on the upside, we are at least now seeing that come through”.
Regarding current forecasts that are out in the market, it appears to be early days for NTQ in relation to FinnCap, which has succeeded Investec and the CFO says that whilst they are comfortable with the current forecasts that cover the current financial year, they will be looking to push the figures into a couple more out years when the next note emerges in conjunction with the final results. That suggests the recovery is well on track with visibility and Steel reiterates that H2 has gone well as per the statement and that a $10m MWD business is a nice one to have in its own right.
Given the current forecasts out in the market which could well prove conservative moving forward, it is perhaps surprising to see the share price stuck in its current groove.
Law, who last month bought 142k shares at 14punderstands investors frustration, but says that they are not aware of any seller in the market and points to a sizeable and impressive institutional shareholder base that is supportive.
He is also keen to see an increasing retail investor base though and they appear keen to broaden their reach and engage with existing and would-be shareholders going forward.
On the Institutional front, Steel points out that Premier Miton (Gervais Williams) has over the last few years built up its stake and is supportive of the story, in particular the potential of the forthcoming novel Saber product.
Saber is a tool that is said to be a much more reliable, accurate and agile rotary steerable system, that is steered right at-the-bit, reducing wear and improving project uptime and cost-efficiency in the drilling process. Law says that in terms of the size of the market and the opportunity for Saber at $2bn, it greatly eclipses that of MWD.
Markets include oil and gas, but also geothermal and methane capture where it has already proven to operate successfully at high temperatures. Here, it can score, as there aren’t, according to Law that many high temperature rotary tools around.
The system, the CEO says has also been designed to operate at a high temperature and it has already done some successful field trials around methane capture.
A further positive is that Saber will also be complementary to the MWD products which relay vital information, so if packaged together NTQ could deliver what the CFO describes as an exciting integrated offering.
The path to commercialisation for a new or novel disruptive product can be a long and arduous one and that is before sales are even generated, so perhaps for now and rightly so, the market isn’t prepared to factor in anything for the potential upside.
But, both Law and Steel sound positive on Saber, with the CEO confirming that they are on track for the commercial launch this year as previously stated. He says that they have undertaken a lot of testing and have also had a lot of customer demand asking to be field test partners and these are coming from all over the world.
Such interest is taken as a real and reassuring positive as Law says by nature, it is an industry that is historically slow to embrace new or changing technology.
Clearly there is plenty of excitement around Saber and Law adds that they want to get everything absolutely spot on before launching which will be done with a very careful introduction. Field trials the CEO says take anywhere from a day or two to a week, alongside the logistics, depending on where the specific trial is to take place, so seemingly not a protracted lengthy process.
In terms of production and assembly there is and will be some outsourcing undertaken, along with in-house work at the company’s new Cheltenham facility, so everything appears to be in place for the launch go according to plan.
For that launch of Saber, the initial plan is to grow a rental fleet and this is where the remaining spend is focused now, as most of the engineering development costs have already been covered.
This leads me to the balance sheet and as to whether there is ample headroom to avoid a raise from shareholders.
Steel says that they are comfortable on this front, as they have just short of $5m in cash, along with a $1m banking facility but importantly an existing business that is cash generative and growing revenue.
Steel concludes, “we not only have sufficient cash to finish commercialisation of the product, but also to get into a fairly significant rental fleet that will then obviously start generating cash of its own”.
CEO Law adds that it is worth noting that the beauty of the situation is that they know the market already exists where there are existing day and operation rates already in place, presumably for guidance.
That, combined with other positive factors along with NTQ’s already established presence in the market should bode well for Saber proving a success as it makes the step change into full commercialisation.
At present, the business as mentioned is only valued on the existing MWD product set and to that end the shares already look good value, not least as the picture here is clearly improving.
With FinnCap putting in place revenue for this year of $10m and a pre-tax profit of $1.2m the expected EPS of 1.8c sees the shares currently trading on a PER of 10 which may yet prove conservative.
Looking beyond this year it should be interesting to view numbers for consecutive periods, where continued progress from MWD should be complemented by Saber, which could prove something of a game changer.
Obviously further to go at NTQ, but the signs and vibes look and sound positive where upside risk would appear to outweigh the downside over the near and medium term.
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