Small Caps | Mar 07 2012
– Goldman Sachs initiates with Neutral on Matrix Composites
– Attracted to exposure to oil and gas services sector
– Stock is limited by valuation at present but re-rating potential remains
By Chris Shaw
Goldman Sachs has picked up coverage on oil services group Matrix Composites and Engineering ((MCE)). The shares were very popular among investors during their rally beyond $9 by early 2011, but overall market interest has deflated since, as has the share price.
Matrix manufactures and supplies engineering products and services to the offshore oil and gas, mining, mineral processing and manufacturing industries. The company is also a leading manufacturer of buoyancy systems through its Composite Materials division.
Goldman Sachs has initiated with a Neutral rating, attracted to Matrix's long-term exposure to global offshore oil and gas exploration, drilling and production, especially as activity continues to increase in this sector.
Significant investment in developing product patents and intellectual property offers Matrix an advantage over peers in the view of Goldman Sachs, while also making the company attractive to larger players looking to increase exposure to the market.
There are some shorter-term concerns associated with Matrix, the most significant of these for Goldman Sachs being the view achieving nameplate manufacturing capacity at the Henderson facility by May of this year will be something of a challenge. Given this, Matrix's progress as the target date approaches will be closely monitored.
Additional key risks are the oil price and lumpy or high-value orders, which make revenues less consistent. JP Morgan also touched on this post the interim profit result of Matrix, indicating while the outlook for FY13 was promising some evidence of the quotation pipeline being converted into real orders would be needed to justify a more positive view than the broker's current Underweight recommendation.
The other issue for Goldman Sachs is valuation, as at current levels Matrix is estimated to be be trading at a 3% premium to its closest domestic peers on FY13 estimates. This assessment is based on earnings per share (EPS) forecasts for Matrix of 23.1c this year and 33.4c in FY13, which compares to JP Morgan's EPS estimates of 13.5c and 31.2c respectively.
JP Morgan's forecasts were trimmed post the recent interim result, one the broker viewed as weak given the delays at the Henderson plant. Other factors impacting on earnings in the period were a strong Australian dollar and higher than expected costs.
The changes to forecasts made by JP Morgan were enough for the broker's price target to be lowered to $3.33 from $3.69. This puts the Goldman Sachs target of $3.75 at a solid premium, though it represents a discount to Goldman Sachs's discounted cash flow valuation of $4.50.
Goldman Sachs sees potential for Matrix to be re-rated closer to the Small Industrials market multiple around the time of the full year earnings result in August. This is because the result will offer management the chance to deliver on guidance given the Henderson plant should be at capacity by then.
Shares in Matrix today are weaker in an overall weaker share market. As at 11.50am the stock was down 6c at $3.46. This compares to a range over the past year of $2.80 to $9.80.
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