Neptune Marine Services Limited NMS Friday 12 September 2008
Integrated expertise in a high margin growth field gives strong opportunity
Recommendation: Buy for rapid growth at low P/E
Investment Rationale NMS is rapidly building itself into quite a unique position offshore Australia and elsewhere via its strategy of acquiring specialist diving and offshore services groups and welding them into an integrated engineering services provider. NMS has unique technology that enables a dry permanent weld to be made in situ under water, accredited by global ship and pipeline certification societies. Through acquisitions on low P/Es, NMS is now active in Australia, South East Asia, the US and the North Sea. It provides subsea engineering services, pipeline engineering, inspection, commercial diving services, specialist fabrication, hydrographic survey works and subsea welding. Acquisition principals retain shares, earn-outs and management roles. Shared services, global networking, scale and integrated market presence create extra opportunities, shared expertise and customer confidence. NMS has captured a commercial advantage in a specialist area much in demand as the pace of subsea oil & gas investment and facility maintenance is growing at over 25% pa globally, with over $100bn Australian projects in development or planning. Events FY08 results confirmed strong profit and cash flow at NMS, although below expectations. This can be put down to timing as jobs are affected by weather, vessel availability and other factors and NMS started FY09 with a strong carryforward workload over $50m. Figures below show the growth trend: Period / $m Revenue EBIT Normalised NPAT Reported NPAT Normalised EPS, ¢ FY06 1.8 (2.7) FY07 15.5 2.0 1.8 -6.4 1.9 1H –2H07 0.8 14.7 -1.2 -5.2 FY08 86.7 13.8 10.9 7.4 4.4 1H 2H08 31.7 55.0 2.2 8.7 0.85 6.55 FY09 128-135 34-37 22-24 7.5-8.5 1. Normalised NPAT is pre AIFRS non-cash charges on employee share-based payments and inferred interest on discounted deferred acquisition payments. 2. Cash flow was a strong $10.9m (FY07 $-3.3m). Cash at year-end was $18.2m. Capital raised during the year was $61m, all at 95¢, funding three acquisitions ($45m), two in WA and one in the UK, and capex of $18m. 3. Offshore Services (Diving, Fabrication & Survey) revenue rose from $16.8m to $51.9m, EBIT $11.0m; Engineering & Project Management from $14.9m to $34.8m, EBIT $7.1m. Segments have grown 42% to 69% from acquisition. 4. The focus for FY09 is consolidation and fostering high levels of organic growth; migrating the integrated services model into the US and UK to build organic growth in those regions; and to leverage its small but growing fleet of two versatile support vessels and three ROVs (remotely operated vehicles). 5. MD Christian Lange again confirmed guidance of $22-24m normalised NPAT for FYO9 and said “… a robust pipeline of tenders and bids is pending.” Recommendation Impact 12 March Strong Buy 0.525 NMS has specialist expertise to work on the massive amount of ageing offshore infrastructure worldwide and the complex projects underway. It is a high margin business with significant barriers to entry. Profit progress has been rapid and integration appears to be progressing successfully. The results and guidance endorse our strong BUY recommendation at these prices.
NMS Price at posting:
51.5¢ Sentiment: None Disclosure: Not Held
