neptune trident vessel, page-2

Company: Neptune Marine Services Limited
ASX Code: NMS
Market Cap: $254m
Share Price: $0.76
Recommendation: Accumulate/Buy

Neptune Marine is commonly referred to as a “one-stop underwater services shop” for the offshore oil and gas industry. Formed in 2003, the company has quickly gained traction on international markets as a leading specialist in a somewhat ‘peculiar’ field and demand for the company’s services has not waned.

Employing more than 500 people in Australia, the UK and USA, Neptune provides a full suite of innovative engineering services including subsea and pipeline engineering; commercial diving; specialist fabrication; inspection, repair & maintenance; pipeline stabilisation and grouting; subsea consultancy; ROV and vessel supply; hydrographic surveying, project management and dry underwater welding using the group’s patented NEPSYS technology. The company’s expertise consolidates engineering and project management skills that have been developed over a quarter of century, with a key focus on delivering innovative and cost-effective solutions.

Neptune’s success hinges on growth in the pipeline of tendering opportunities and it has been pleasing to note that potential contracts in the global oil and gas industry have not slowed. Neptune’s main clients are the dominant forces in oil & gas – e.g. Chevron, BHP, Woodside – and current workflow is robust. 60% of revenues are generated from the production phase of the oil and gas capital expenditure cycle, equating to resilience in the revenue stream despite volatility in oil and gas prices. Furthermore, once oil and gas fields begin production, they are rarely abandoned.

Future earnings growth is expected to be evenly balanced between organic and acquisitional, across geographies. Although the bulk of earnings is currently being generated from Australian operations, upside potential remains in US and UK markets where Neptune already has a significant presence. Numerous opportunities also exist for expansion in South East Asia. Closer to home, huge expenditure is anticipated in the North West Shelf on newly approved LNG products. On top of the recent green light given to the $70bn Gorgon LNG project (which Neptune will be a service provider to), 40 projects are earmarked for development in the 2010 – 2012 period. Whilst the exact nature of how Neptune will benefit remains somewhat uncertain at this stage, as the leading marine services provider in Australia, we envisage contract revenue to receive significant boosts.

The company’s FY09 results reflects the exceptional earnings growth currently being experienced. Revenues were up 118% and underlying NPAT rose to $25.1m, a 132% increase on FY08. Importantly, operating cashflows rose to $35.4m, up from $10.9m. During the period, Neptune won in excess of $100m worth of new contracts and managed to significantly grow its vessel and ROV division. With the key exposure to the North West Shelf, it is envisaged that revenue streams will continue to expand over the longer term.

In order to stabilise the balance sheet, Neptune conducted a $53m cap raising during June/July 2009. It enabled the company to reduce the debt incurred from a recent spate of acquisitions and still have $24.3 in cash left over. Gearing (net debt/equity) has been lowered to a very respectable 7% and interest cover (EBIT/interest expense) is now 10 times. A solidified balance sheet enabled management to conduct capex of $49.2m during the year.

So where to from here? Importantly, Neptune did not stop growing its strategic footprint during the worst of the downturn and acquisitions have broadened the range of project design and implementation services it can deliver. The company is poised for both acquisitive and significant organic growth in its key markets, and will benefit from a positive outlook to oil and gas industry capex. With gearing reduced to 7%, the $53m capital raising under its belt and ongoing improvements to cashflows, Neptune is emerging as a ‘premium’ oil services company. Currently trading on a PE of 10.2, the valuation prospect is undemanding considering the growth outlook confronting the company and sector. We are recommending that our clients accumulate/buy at these levels, with a recent pullback potentially offering an attractive long-term entry point.