euroz - nms buy price target 67

Spoke to Euroz, they are strong buyers at these levels

Australian Equities Research

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Neptune Marine Services Ltd (NMS $0.50) Buy

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Price Target: $0.67/sh


Reason For Update: 1H10 earnings guidance


What we know:
NMS has announced it expects a breakeven to $1m loss for 1H10, which has primarily been impacted by a lower level of activity caused by the GFC.
The level of offshore subsea services in the US and South East Asia have suffered as a consequence of 1) a drop off in gas drilling in the US impacting subsea diving requirements, 2) a deferral of Inspection, Repair and Maintenance (IRM) projects and 3) lower vessel and ROV utilisation.
NMS expects a strong turnaround in earnings in 2H10.
There are signs of recovery in the US and Asia for IRM work and vessels have now been contracted for new work.


What we think:
Whilst the 1H10 result is disappointing, it certainly is not a true reflection of the normal earnings of the business. It has simply been impacted by a lower level of the high margin offshore services work as a consequence of the GFC.
There are emerging signs of a recovery in diving services and IRM work and the vessels are back to work.
As a consequence of the poor 1H10 result, we are reducing our normalised NPAT forecast for FY10 to $8.4m, from $23m, and implies NPAT of $9.4m for 2H10.
The key to a turnaround in earnings is having the vessels back to work; recent contract wins have the vessels and ROVs relatively well utilised in 2H10.
Although there are emerging signs of a recovery in diving services and IRM work, we are not forecasting any significant recovery for this work in 2H10. We expect a stronger recovery to take place in 1H11.
The balance sheet remains in good shape; we estimate net debt of approx $20m, representing a net debt to equity ratio of only 10%.


Investment Case:

Our 12 month price target has decreased to 67 cents per share, from 80 cents per share, set at 12 x our revised normalised EPS forecast of 5.6 cents for FY11.
NMS is trading on 9x our normalised EPS forecast of 5.6 cents for FY11, a relatively undemanding multiple based on the normal earnings of the business in our view.
The long term macro remains strong for global subsea expenditure as a consequence of ageing infrastructure and deepwater oil & gas production growing in place of the depleting shallow water oil & gas production.
Contract opportunities for IRM work and vessels are improving and further contract wins, particularly for NEPSYS, would provide upside to our forecasts and price target.
We maintain our Buy recommendation.