comments from patersons

Neptune Marine Services Limited (NMS) - SPEC BUY

Turning the ship around

* Following earnings revisions we estimate NMS is currently trading at relatively cheap forward multiples (partially warranted in our view given recent track record). NMS' new management team report that most elements of the group restructure are complete with the group's final vendor earnout payment due early next week. The recently rejected takeover proposal also underscores value in our view after the elimination of all term debt. We retain the SPECULATIVE BUY recommendation. Our blended price target is 4.2cps.
* Earnings revisions. In light of weaker market conditions for offshore services and greater competition, lower margins particularly in the survey, stabilisation and ROV businesses are likely to mean NMS misses our previous forecast in the short-term. As a result we are now anticipating FY12 EBITDA of circa $11.7m (prior $17.6m).
* Messy FY11 result but underlying 2H profitable. The FY11 result included numerous one-off items however operating EBIT before forex improved from a $2.9m loss in 1H11 to a $3.0m profit in the 2H. The turnaround was mainly attributable to aggressive overhead reduction initiatives actioned in January and the sale of the Trident announced in April.
* Still early days but cheap on key metrics. We highlight that NMS is currently trading at NTA backing (3.1cps) with $6.7m in net cash, improving earnings momentum and priced at a forward EV/EBIT multiple of 4.2x compared to the resource services sector median currently at 7.1x. We expect earnings delivery to substantially close this valuation gap.
* Earnings drivers & catalysts. With restructuring largely completed we expect management will now be able to spend more time on driving top-line growth. Short-term catalysts include 1) the group's final vendor payment of $4.2m which relates to the Access Management acquisition; 2) the sale of the Australian fabrication business and 3) new contract wins; and 4) earnings delivery.