Buy Ratings For Miclyn

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By Chris Shaw

According to Macquarie, Asian oil demand is expected to substantially exceed production in the region by 2030. Given the Asian region contains 47% of the world's underdeveloped shallow water oil and gas fields, the broker sees opportunities for companies servicing this market.

One such company is Miclyn Express Offshore ((MIO)), which is one of the largest providers of service vehicles to the offshore oil and gas industry in Australia, Asia and the Middle East. Macquarie has today initiated coverage on Miclyn with an Outperform rating and $2.25 price target, while JP Morgan has also initiated coverage with a similarly positive Overweight rating and target of $2.16.

JP Morgan notes Miclyn's fleet, which includes offshore support vessels, crew boats, barges and coastal survey vessels, supports all three phases of the offshore oil and gas activity chain. This means the company offers a vertically integrated chartering business.

One positive is almost 80% of earnings are exposed to development and production, which are the less volatile sectors of the market. Miclyn generates most of its revenues from contracts, which implies good earnings visibility. As evidence of this, JP Morgan notes 80% of 2010 revenues are already contracted or highly probable. Revenues appear to be low risk given a blue chip client base including the likes of Chevron, Petronas and Saipem.

Earnings before interest and tax for 2010 is forecast by JP Morgan to come in at around US$61.4 million, which is in line with management guidance. This is expected to grow to US$69.1 million in FY11 and to US$73.9 million in FY12.

In earnings per share (EPS) terms JP Morgan is forecasting outcomes of US21.9c in FY11 and US23.7c in FY12, while Macquarie's estimates stand at US19.1c and US20.4c respectively. The FNArena database shows only Macquarie and JP Morgan cover Miclyn at present.

Macquarie's $2.25 target compares to a valuation range of $1.88-$2.13, which is based on an earnings multiple of 8-9 times the stockbroker's FY11 forecasts. The broker's target is set at a 10% discount to peer Mermaid Marine ((MRM)), which Macquarie suggests trades at a premium given its focus on Australia and supply base assets, along with a strong operating track record.

In Macquarie's view, there is value in Miclyn at current levels given the earnings multiple discount to peers. JP Morgan shares this view, also noting Miclyn is trading at a significant discount to Mermaid Marine at present based on both FY11 and FY12 estimates. The FNArena database shows Mermaid Marine is rated as Buy three times and Hold twice.

One advantage Miclyn has over some of its peers, according to Macquarie, is a relatively young and diverse fleet, which impacts on the company's future gearing ratio given the cost of replacing vessels and expanding the fleet.

Macquarie also notes Miclyn has a strong balance sheet and therefore the ability to fund its capital expenditure plans, which should allow management to consolidate and grow in key markets.

JP Morgan expects this growth will be reflected in increased penetration of offshore oil and gas markets in Australia, Indonesia and Malaysia, as well as an upward trend in charters rates. Macquarie also expects rates to recover, noting since the Global Financial Crisis there has been a stabilising of day rates for vessel charters.

Shares in Miclyn today are higher and as at 1.05pm the stock was up 4.5c at $1.645. This compares to a trading range since listing earlier this year of $1.49 to $1.95 and implies upside to the average price target of better than 30%.

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