Strong Growth Ahead For Mermaid Marine

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By Chris Shaw

Mermaid Marine ((MRM)) delivered a solid full year earnings result, profit of $37.9 million coming in at the upper end of market expectations. The result was helped by a stronger second half performance, Credit Suisse noting profit before tax rose 6% in the second half relative to the previous six months.

What the stronger second half also means, comments Deutsche Bank, is as much as 65% of FY11 budgeted earnings are now already locked in. This should grow in coming months in the broker's view as it notes a strong pipeline of contracts are up for tender and Mermaid Marine should win its share of these.

Morgan Stanley agrees, suggesting Mermaid Marine has a number of steps to drive earnings growth. These include expanding and renewing its offshore vessel fleet, moving the Dampier supply base from a strategic to an earnings generating asset and expanding operations generally in both the North West Shelf and the Browse Basin.

Additions to Mermaid Marine's fleet are underway, Credit Suisse noting four new vessels have recently been added with a further two expected towards the end of FY11. As the Gorgon project ramps up, utilisation rates should improve, which underpins expectations for solid earnings growth in coming years.

To reflect this, Deutsche Bank has lifted its earnings per share (EPS) estimates by around 4% for FY11 and by 5% in FY12 to 22c and 25c respectively. UBS reacted to the result by making changes to its forecasts of a similar magnitude and expects EPS of 20c in FY11 and 21c in FY12.

Credit Suisse has actually trimmed its FY11 estimate post the full year result and is forecasting EPS of 20.2c this year and 24c in FY12. Consensus EPS estimates according to the FNArena database stand at 20.3c for FY11 and 23c for FY12.

What keeps Credit Suisse positive on the stock is firstly the potential for solid earnings growth as activity in both the North West Shelf and from the Gorgon project continues to pick up. Secondly, the broker highlights there are significant barriers to entry for anyone trying to move into what is a capital intensive business.

Mermaid Marine has the same capital requirements as would newcomers, but on Credit Suisse's numbers the company has the balance sheet capacity to fund this spending. The likely earnings growth and visibility of group earnings justifies a higher premium than the market is pricing in at current levels in the broker's view.

Credit Suisse post the result has retained its Outperform rating and $3.30 price target, which compares to an average price target according to the FNArena database of $3.12. This is up from $3.09 prior to the profit result. The database shows Mermaid Marine is rated as Buy three times and Hold twice.

Deutsche Bank also rates Mermaid Marine as a Buy, pointing out its price target of $3.40 implies earnings multiples of 15.1 times in FY11 and 11.3 times in FY12. The broker sees this as offering value given the expectation peak cycle return on assets can be sustained until FY14.

Morgan Stanley is not in the FNArena database but the broker is also positive, rating Mermaid Marine as Overweight within an In-Line view overall for the emerging companies sector. UBS agrees, seeing the company as a beneficiary of the ongoing development of oil and gas assets across northern Australia.

But Macquarie has stuck with its Neutral rating, taking the view while the earnings outlook for Mermaid Marine is positive this is priced into the stock at current levels.

Shares in Mermaid Marine today are weaker and as at 2.30pm the stock was down 11c or just over 4% at $2.59. This compares to a range over the past year of $2.25 to $3.25 and implies upside of around 20% to the average price target according to the FNArena database.

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