Deutsche Sees Opportunity In Mermaid Marine

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By Chris Shaw

Australian mining service companies have attracted renewed interest from investors, though much of the focus has been on mining contractors or suppliers of accommodation facilities for miners.

Despite a market capitalisation of close to $500 million, Mermaid Marine ((MRM)) hasn't received the same attention, possibly because it offers more specialised services including crew vessel charters, vessel manning and management and logistics assistance.

For Deutsche Bank this suggests an opportunity for investors, particularly as the company is exposed to the Western Australian oil and gas industry and some major projects planned for the region. The Gorgon project of Chevron, Shell and Exxon Mobil will be a key medium-term driver as leading into first production in 2014 there will be an estimated $43 billion in capex spending.

As well, Woodside ((WPL)) will continue to develop its Pluto gas project as part of what is expected to be another $60-$70 billion in project spending. Deutsche expects peak-cycle conditions in this market can continue for the next four to five years, with returns for Mermaid Marine supported by its monopolistic Dampier supply base asset.

This supply base is forecast to generate a long-term return on assets of 20%, but given current buoyant conditions Deutsche expects it can return better than 25% in the medium-term. This should also help maintain Mermaid's vessel fleet market share in the face of increased competition as the supply base allows the company to offer a more integrated product than others in the market.

Longer-term Deutsche expects the supply base will see the company develop a greater balance in its earnings, as in FY09 vessel operations accounted for around 77% of group earnings. This should come down to around 65% by FY12 as the supply base side of the business expands.

Deutsche notes the supply base, located near Karratha in Western Australia, offers another advantage in that it is the only base in the region of the North West shelf. This means round trip vessel time is far shorter than the 10-day return trip for vessels to Freemantle or Darwin and the 14-day return trip to Singapore.

These extra days give Mermaid additional opportunities to charter out vessels and help the oil and gas companies avoid project delays, which is an important leg-up on its competitors.

As Mermaid ramps up operations at the Dampier supply base following $100 million in development spending and with the company taking advantage of the delivery of four new vessels this year, Deutsche expects a three-year CAGR (capitalised annual growth rate) for net profit of 21%.

In earnings per share (EPS) terms this suggests a solid outlook, Deutsche forecasting EPS will grow from 19c this year to 21c in FY11 and 24c in FY12. Consensus EPS forecasts according to the FNArena database stand at 19.2c in FY10 and 20.4c in FY11.

Risk is to the upside in Deutsche's view as there is scope for management to increase efficiencies at the supply base, while strong short-term demand means there is also the potential to increase vessel charters.

Deutsche suggests this is not fully factored into forecasts elsewhere in the market, as evidenced by its EPS estimates being 3% above consensus in FY11 and 9% in FY12. The earnings growth outlook forecast by Deutsche Bank is enough for the broker to initiate coverage on Mermaid with a Buy rating, its valuation-based price target being set at $3.25.

Along with Deutsche's Buy rating, the FNArena database shows Mermaid Marine is rated as Buy twice and Hold twice, with an average price target of $3.04. Deutsche's target is the highest in the database, while Macquarie is the low mark with a target of $2.50.

Shares in Mermaid Marine today are higher and as at 11.45am the stock was up 4c at $2.75. This compares to a trading range of $1.26 to $3.25 over the past year and implies upside of around 11% to the average price target in the database.

On current consensus data, the shares are trading at Price-Earnings (PE) ratios of 14.2 and 13.4 for FY10 and FY11 respectively. This is below the market average on both accounts. Implied dividend yields are 2.7% and 3.0% respectively. For more details: see Stock Analysis on the FNArena website.

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