|
|
|
|
|
 MARKET REPORTS |
|
Analyst report - shares
Stock of the week – Mermaid Marine
January 14, 2007
Tim Morris, wise-owl.com analyst
Stock: Mermaid Marine Australia
Recommendation: BUY
Code: MRM
Market Cap: $289m
With the oil price breaking over $100 a barrel for the first time in recent weeks, it appears that the days of easy and cheap oil could be over. This notion is often championed by our contacts in the oil and gas sector who highlight that future sources of oil production will have to come from more remote and technically challenging locations, as conventional land based reserves deplete.
Making offshore and deepwater exploration more feasible and increasingly common has been the strength in the oil price, which has risen 5 fold in just 6 years, including a 57% jump during 2007. Capitalising on these trends has been Mermaid Marine, provider of a range of marine related services to major oil and gas exploration and production companies.
Mermaid Marine is a diversified operator of tug services, workboats, barges and labour hire, operating in the buoyant North West shelf and Browse basin regions off the West Australian coast. The company also hosts supply bases in Dampier and Broome that offer private wharf and ship repair facilities capable of servicing the range of vessels engaged in offshore support activities.
Mermaid has been operating for a quarter of a century; however earnings have begun to take off over the last few years, with net profit rising from $2.5m in 2005 to $12.5m last year. This most recent full year result was strong on all fronts, with revenue’s rising 54% to $103m, net profit up 35.9% to $12.5m, and diluted EPS up 33% to 8.78c. When abnormal items from the prior years result are ignored, the result looks even stronger, with operating earnings rising 120%.
The company’s cash position supports these results, with operating cash flow of $18m, 56.9% higher than last year. When borrowings and additional share issues are taken into account the company’s cash position looks even stronger, coming in at $16.9m, 180% greater than last years figure. The balance sheet has also strengthened, with net debt to equity now at 55.8% compared with 83.2% last year.
The performance even caught the eye of P&O Marine Services, and a merger was on the cards this year until the deal collapsed at the last hurdle. The performance of the company was substantially exceeding management’s expectations, and, as Mermaid’s future outlook grew brighter, it was decided that shareholders would benefit the most by going it alone, rather than merging.
To ensure that their decision produces the best result for shareholders, management has developed a new five year strategy. This is designed to capitalise on the unprecedented growth in demand for offshore marine services in the North West Shelf and Browse Basin regions as a number of large projects move towards Final Investment Decision over the next couple of years.
A positive stage has been set in the region following Woodside Petroleum’s decision to proceed with development of its $12bn Pluto LNG project in July last year. The project represents the largest single investment by one company in the Australian resources sector. First gas is not expected until 2010, however the long lead times associated with such projects shouldn’t bother Mermaid Marine as its service offering caters to all phases of offshore oil and gas development.
Mermaid has been making significant investments in its vessel fleet and supply base assets to ensure that the company is well positioned to capture the opportunities that these major Australian projects will present. During 2007 over $20m was invested in the vessel fleet, and $2.5m on the Dampier Supply Base. The vessel fleet is now is 23 strong, the average age of which has halved since 2003 to 10 years.
For the coming half year management expect earnings to exceed that achieved in the previous period, however specific guidance has not been issued. With the stock trading on a forward PE of over 17 – a premium to the broader market – some growth has been priced in. However in light of the company’s long term growth outlook this premium may be warranted. Our favourable view on the stock also lies in its ability to offer exposure to the oil and gas sector, free from the volatility normally associated with explorers and producers, whose share prices gyrate wildly as dry wells and production issues are encountered.
However the company’s fortunes are linked to long term trends in oil and gas prices. Although the outlook for these commodities remains bullish, an unexpected slump could dampen development activity in the sector, affecting Mermaid’s earnings potential. Another key risk recently highlighted by management comes from the tight WA labour market, which has created a challenge in recruiting the personnel needed to facilitate the company’s expansion ambitions.
See the "Stock of the week" article on Mermaid Marine from September 2007 for more information.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
More articles from this edition of CompareShares:
Trading: Can a charting or trading package make you rich?
Stocks: Fund manager stock tip: ABB Grain
Resident Trader: Book Review: Supercharge your Trading with CFDs
Stocks: Stock of the week - Mermaid Marine
Analysis: Should we fear a US recession?
Commodities: As the bear resurfaces in the US, gold thrives
Economics: Slip sliding summer
CFDs: Top 10 CFD Stocks
Markets: Wall St falls sharply
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
 Email to a friend
 Print this article
|
|
