The Patersons report is a complete cop out in my opinion. If they really believe in the cashflows they are forecasting, then they should be valuing Neptune at $1.13 per their discounted cashflow valuation, rather than at $0.70 based on a capitalisation of earnings approach of 5.5x EBIT. The DCF better reflects the significant growth being generated by the business. A price of $1.13 would represent a p/e multiple of 13.7x, and be more in line with that of Mermaid Marine, which is 12.0 (this would be reasonable if Neptune's growth is more than Mermaids). Patersons target valuation of $0.70 represents a p/e of 8.5x and Neptune is currently trading on a p/e of 6.8x- doesn't make sense if Paterson's forecasts are realistic.
In addition, Paterson is forecasting Neptune to generate $23.4m of free cashflow in 2010 of which will be used to pay a $13.3m dividend leaving a closing cash balance of $21.4m. This is ridiculous- Neptune will use this cash (the amount earmarked by Patersons for a dividend and probably most of the closing cash since gearing is so low) to make more acquisitions, buy vessels and ROVs- all of which will add to the substantial earnings growth thats already been forecast. Thats what they've done so far and its the correct thing to do for a growth company which can deliver high returns on its investment.
In my opinion Neptune is grossly undervalue if Patersons forecasts are realistic. The big question mark is therefore the level of risk attached to Neptune achieving these forecasts. Thats the reason why I would like more guidance from the company on their ability to continue delivering growth in FY 10
NMS Price at posting:
56.0¢ Sentiment: LT Buy Disclosure: Held
