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MMA Offshore Video


 

MMA Offshore Limited (BUY)

MMA offshore Limited, formerly Mermaid Marine Australia Limited (MRM), the Australia-based company providing marine logistics and supply base services for the oil and gas sector, is the focus of this report. The recent response of MRM to ASX price and volume query entailed the Company statement of expecting operating profit before tax for the 6 month period ended 31 December 2014 to be approximately $55 million. This has been reported to be in consensus with market expectations. The sales of $597.94 million was reported for the fiscal year ending June of 2014, reflecting an increase of 33.0% as opposed to $449.49 million achieved in FY13. Sales of Vessels witnessed an increase of 57.0% in 2014 from $283.72 million to $445.41 million. However, sales of Slipway dipped 26.2% to $18.37 million and sales in Supply Base also decreased down 13.0% to $130.82 million. Supply Base had the highest operating profits in 2014 with operating profits equaling 28.2% of sales. The market capitalization of the Company is $456.62 million.


Vessels Operations (Source – Company Reports)

During the 12 months ending 30 June 2014, MRM paid dividends totaling $0.13 per share. It is to be noted that the Company has increased its dividend during each of the past 5 fiscal years. MRM reported earnings per share of $0.09 during the fourth quarter of 2014, which has been a drop of 24% versus the fourth quarter of 2013. As of June 2014, MRM’s long term debt was $393.63 million and total liabilities were $627.15 million.

 
Dividends per Share (Source – Company Reports)

It is to be noted that the current approach of capital expenditure reduction by the oil and gas sector may impact MRM’s growth to some extent. However, committed capex should help withstand FY15 earnings at a realistic level in the short term. It is also to be noted that the share price of the Offshore Support Vessels (OSV) operators is closely related to movement in oil prices. We expect that with the gradual oil price strengthening, the stock price will be doing as per the market anticipation. In such scenario, it will be prudent to keep an eye on the 1H FY15 results which may be in concurrence with 2H FY14 given the completion of the Subsea 7 contract and the last stages of construction of Gorgon. Based on developments with regards to Chevron revealing plans to construct Train 4 at Gorgon, there can be a further surge in performance.


Cash at Bank (Source – Company Reports)

Offshore oil and gas activity in Western Australia is predicted to slow-down with completion of the AUD 75 billion of LNG projects in the North West Shelf, Browse Basin, and Timor Sea during the next three years. However, a close watch over contracts with Wheatstone and Ichthys LNG projects is necessary to monitor any sizzle in growth profile. The Europa contract may also provide a source of revenue for 2H FY15. Jaya’s acquisition in June 2014 is expected to transform MMA Offshore’s business in the next two years and will boost growth. Market although expects that operating margins may average 17.5% in near future owing to weakening customer spend but we believe that expansion into Southeast Asia where returns and margins are higher than the Western Australian business will offset such negatives.


Fleet_Key Markets (Source – Company Reports)

The risks to be wary of entail market volatility, loss of contracts, wage negotiations with associated unions, delays to contracts such as Wheatstone and Ichthys, and over-capacity in Southeast Asia reducing JAYA margins.


MRM Daily Chart (Source - Thomson Reuters)

As per the recent update, the Company said that oil price scenario is a concern but a lot of its vessels are being utilised in the construction phase of projects at the moment which are expected to continue. MRM is focused on securing long term production support work, such as the significant INPEX contract which was won in 2014 worth of $500 million. As per the Company, the cyclical effect of the price change will see the light of the day in near future.

Given the above, we put a BUY recommendation for this stock at the current price of $0.875.