Mermaid Marine Reaping Downgrades

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–  Mermaid Marine's interim result proved better than expected

– Strong growth is forecast to continue

– Stockbrokers have downgraded their ratings on valuation grounds

 

By Chris Shaw

Market forecasts for interim earnings for marine services provider Mermaid Marine ((MRM)) had been for a profit of around $19.5 million but the company was able to better this, delivering a result for the period of $20.4 million. 

This was an increase of better than 30% in year-on-year terms. According to commentary from stockbroking analysts post the event, Mermaid Marine's H1 report demonstrated the ability of management to leverage the capital it invested in FY10 to take advantage of improved market conditions and a dominant position in the company's core markets. Analysts at Credit Suisse noted the result was driven by strong operating performance from both the Vessels and Supply Base/Slipway operations.

Strong earnings growth is expected to continue, company management indicating second half performance should be better than that recorded in the December half. This has prompted increases to forecasts across the market. RBS Australia, for example, has lifted its earnings forecasts by 2-6% through FY13.

UBS has increased its forecasts by 2-8% over the same period and is now forecasting earnings per share (EPS) of 20c this year, 24c in FY12 and 26c in FY13. Macquarie's EPS forecasts stand at 20.7c, 23.3c ad 25.8c respectively, while consensus estimates according to the FNArena database stand at 20.7c in FY11 and 24.1c in FY12.

These increases in earnings estimates have pushed up price targets, the FNArena database showing a consensus price target for Mermaid Marine now of $3.62, up from $3.36 previously. Targets range from Deutsche Bank at $3.45 to Credit Suisse at $3.80.

Looking longer-term there are a number of potential growth opportunities for the company. Macquarie has identified the Gorgon, Macedon, Wheatstone, Pluto 2, Sunrise and Browse projects as examples of where the company could pick up additional business.

There is money available to fund growth as well, as a recent placement and share purchase plan raised about $64 million. Most of this money has still to be spent. Macquarie expects the money will be put towards additional platform supply vessels.

This should strengthen Mermaid Marine's market position, something Macquarie suggests will lead to further upgrades to earnings going forward. To reflect this view, Macquarie retains its Outperform rating on the stock post the interim result.

This puts Macquarie at odds with most in the market, as post Mermaid's profit announcement the stock has been downgraded by UBS, Credit Suisse and RBS Australia. All three have lowered ratings to Hold from Buy, primarily on valuation grounds. The FNArena database now shows two Buy ratings and three Holds.

UBS notes recent share price gains have lifted the share price to a smaller discount to its revised price target, so necessitating the downgrade. Credit Suisse has lowered its rating for the same reason, taking the view an estimated 15 times earnings multiple in FY12 only justifies a neutral view.

Morgan Stanley is not in the FNArena database but it sides with Macquarie in retaining an Overweight rating, this as part of an In-Line view on Australian emerging companies. Morgan Stanley argues Mermaid's position in its markets should allow for the current strong growth trajectory to continue into FY12 and beyond.

Shares in Mermaid Marine today are slightly weaker and as at 2.40pm the stock was down 5c at $3.27. This compares to a range over the past year of $2.25 to $3.40 and implies upside of around 11% to the consensus price target in the FNArena database.

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