results out this week, page-3

Comments on Mermaid Marine from Macquarie Equities this morning:

Monday, 23 February 2009

Mermaid Marine
Interim result

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Volatility Index: very high
Recommendation: Outperform


Event

First half net profit after tax of $12.2m, up 63% on prior corresponding period and ahead of our $10.6m expectation.

Impact

Beats AGM commentary that first half 2009 earnings are likely to grow by 40%. While the headline number was well ahead of expectations, this was driven by a 21% tax compared to our 30% expectation. earnings before interest, tax, depreciation and amortisation of $22.6 was in line with our $24.0m expectation and up 33.2% on prior corresponding period.

Vessel earnings before interest and tax was up 47% to $17.4m (Macquarie $16.9m) driven by strong utilisation. Supply base earnings before interest and tax was up 49% to $4.6m (Macquarie $4.3m).

The domestic oil and gas sector remains a preferred sector exposure give gas prices remain around key hurdle prices and the AUD depreciation benefits for global asset developers. In addition, sector customers tend to be larger companies capable of funding the size of projects being committed to.

A key customer for Mermaid is Chevron. Should either the Gorgon or Wheatstone gas projects proceed, Mermaid will be a key beneficiary given that Chevron has leased 2.5ha (or 40%) of the supply base for these projects. The contract is for five years with a five year option and is worth $100m over the initial term.

The lease is another positive signal for Gorgon given the $1bn FEED study this year and Shell's recent gas sale to China. We also understand tenders are live for other early stage orders. FID on Gorgon is due mid calendar year 2009.

Chevron, the operator of the proposed Gorgon and Wheatstone projects has signed a 10 year lease for an entire 14 story office building in Perth. This development bodes well for these projects and is another indicator that it is gearing up for further developments.

Investing for the future. Mermaid has committed to a $50m expansion of the Dampier supply base in financial year 2009. Now that the formal lease has been signed this work will start. The expansion is to both the yard and the wharf and is expected to be complete by the end of calendar year 2009. This is an exciting development and should provide material earnings growth in financial year 2010 and beyond.

Net debt came in at $52.1m (31% of equity) about $10m better than our expectation. This was partly due to the phasing of capex as operating cash flow of $15.8m was in line with our $15.1m expectation.

Earnings revision

Financial year 2009 earnings per share up 3.2% to 12.9 cents per share. financial year 2010 earnings per share up 3.2% to 14.5 cents per share.

Price catalyst

12-month price target: $1.35.

Catalyst: Delivery of supply base expansion plans. Gorgon is a key driver. Our price target is based on 7.0x financial year 2010 earnings before interest and tax.

Action and recommendation

Outperform. Mermaid is an excellent play on the high levels of oil and gas activity expected in Western Australia over the medium term.