Small Caps | Oct 20 2011
– Neptune Marine a turnaround story
– New management has company on a solid financial footing
– Growth to be supported by exposure to solid industry outlook
– DJ Carmichael initiates with Spec Buy rating
By Chris Shaw
Neptune Marine ((NMS)) provides engineered solutions to the oil and gas, marine and renewable energy industries, but unlike many in the space has had a tough time in recent years as an aggressive acquisition program prior to the GFC almost brought the company undone.
Stockbroker DJ Carmichael, which has initiated coverage on Neptune Marine with a Speculative Buy rating, points out the expansion led to a blowout in net debt but didn't deliver any consistent increase in earnings. The acquisitions also generated a significant increase in corporate costs.
This weakened the balance sheet and has subsequently forced Neptune Marine to repair its financial position via asset sales and a highly dilutive capital raising earlier this year. As part of the raising Singapore based MTQ Corporation emerged with an 11.5% stake in the company, which has since increased to 15.3%.
The capital raising was undertaken at 5c per share and along with the asset sales left Neptune Marine in a net cash position at the end of FY11. Net tangible assets as at the end of FY11 were 3.1c, which is broadly in line with the current share price.
As well as a financial restructuring there have been changes made to the board and management team at Neptune Marine over the past year. The main change was the appointment of Robin King as CEO last November, DJ Carmichael noting he has more than 28 years experience in the oil and gas sector.
New management introduced a turnaround plan and DJ Carmichael notes to date this plan is proceeding on track, as underlying operations appear to have stabilised. This means while there is still some potential for further write-downs in coming years, management should be able to focus on growing the business moving forward.
What should help in this regard is a positive operating environment, as Australia in particular has a significant amount of oil and gas related activity under way at present.
Neptune Marine's strategy will be to generate organic growth and growth of service lines in established geographical regions, while integrating services as part of a 'Total Service Solutions' model. This will require the development of strategic relationships with key partners.
In the view of DJ Carmichael, progress in this respect has been solid to date, as results from both the Offshore Services and Engineering Services divisions have shown stable performance from ongoing operations.
This sees DJ Carmichael forecast earnings per share (EPS) of 0.48c this year and 0.63c in FY13. There is potential for earnings to come in above these numbers, as the broker notes management sees scope for margins to eventually return to levels well above the levels projected by DJ Carmichael.
On the forecasts of DJ Carmichael, Neptune Marine is trading on a FY12 earnings multiple of 5.8 times. While the company is clearly a turnaround story, the relatively attractive multiple and the improved financial position of the company suggest a speculative buying opportunity. This is especially the case given the share price remains well below the price at which capital was raised earlier this year.
Any sale of the US Underwater Services business would likely be a positive catalyst for the share price suggests the stockbroker, while a further potential catalyst is scope for M&A activity involving Neptune Marine, This is a possibility given management noted in August an unsolicited proposal for the company had been received.
Shares in Neptune Marine today are higher and as at 11.15am the stock was up 0.4c at 3.2c. This compares to a range over the past year of 2c to 23.5c. DJ Carmichael has a target on Neptune Marine of 4.5c.
The current share price implies a market capitalisation of around $50 million, which is small enough to mean the stock is not covered by any of the eight brokers in the FNArena database.
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