the australian

Neptune Marine Services (NMS) 78.5c
CRITERION has backed this submarine underwater welding specialist for some time now, with the smart money from Macquarie Bank and Richard Pratt's Thorney Investments more recently following suit.
The stock returned the favour by remaining under water, with management hiccups and earnings disappointments spoiling the story.

Now, Neptune looks to be on a genuine growth spurt and your normally humble columnist claims the credit.

Why? Last October we observed that "Neptune will either swim, or sink to the Davy Jones's Locker of promising companies which failed to make a quid".

Neptune chief Christian Lange took the statement as a challenge and has the words framed in his office. Who needs Rudyard Kipling for inspiration?

Neptune yesterday unveiled a grab-bag of new projects in the oil and gas sector worth a collective $10 million in revenue.

This follows last month's $53 million purchase of the Perth-based Tri-Surv Geomatics and the Texas-based diving contractor US Underwater Services. Collectively, these acquisitions will boost annual revenues in 2007-08 by $20 million and contribute $9-10 million of EBITDA.

Putting this expansion in context, Neptune only managed $1.24 million revenue in the first half (and a $1.1 million loss).

To fund the splurge, Neptune holders yesterday endorsed a $34 million raising, consisting of a $30 million institutional placement and a $4 million, 1-for-20 non-renounceable rights issue.

The new work vindicates Neptune's decision to move from its legacy business of ship repairs to the oil and gas market. Using its patented underwater method, Neptune can do in situ repairs of oil rigs and pipelines.

As a brownfields operator, Neptune performs tasks such as tying in new platforms to existing infrastructure. Compared with greenfields work it's less capital intensive and less prone to a cyclical downturn: once the facility's built it's there and needs to be maintained.

Lange says Neptune is looking to bolster its repertoire in the US, Asia or the North Sea. but has no further specific acquisition plans.

"We will continue to scout around for businesses which suit our model," he says, noting the potential of the Gulf of Mexico ahead of what's tipped to be a severe hurricane season.

We rated Neptune a "hold" at 32c on December 13, having rated the stock a "speculative buy" at 22c in October. Our December call was too cautious, but a HOLD now looks apt after yesterday's 8c, 11 per cent gain.

Neptune expects revenue of $58 million and a net profit of $12.5 million in 2007-08. Accounting for the expanded share base, this equates to earnings per share of 6c.

Neptune should report around $14 million of revenues in the year to June 2007, with the benefit of the two acquisitions (plus two local ones executed last year) only showing in the current (last) quarter.