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Two small-cap stocks to buy - MMA Offshore Limited + G8 Education

Sep 17, 2015 | Team Kalkine
Two small-cap stocks to buy - MMA Offshore Limited + G8 Education

MMA Offshore Limited

Results FY15: 

The company announced its results for FY 2015 and these were affected by the challenging oil price environment. It reported a net loss after tax of $ 51.3 million after booking non-cash impairment charges of $ 120.7 million against the carrying value of the vessel fleet and goodwill associated with the Supply Base business. Excluding the impairment charges, the net profit after tax (NPAT) came to $ 55.3 million which was up 2.7% over the previous year and EPS at 15 cents per share was down by 20.2% over the previous year. A final dividend of 1.5 cents per share was declared taking the full-year dividend to 5.5 cents per share which was down 56% over the previous year and represents a conservative payout in view of the current challenging market conditions. Revenues of $ 796.7 million were up 34% over the previous year and EBIT pre-impairment at $ 86.9 million was up 8.3%.


 
Managing director Jeffrey Webber said that the company performed well in the first half but was hit in the second half by the rapid downturn in the market, founded by a reduction in construction activity in Australia. Vessel utilisation fell from 76% in the first half to 65% in the second and day rates fell by up to 30% as oil and gas companies cut expenditure both capital and operating. The international fleet was particularly hard hit with utilisation bottoming out at 61% and rates are at historical lows. The plan for vessel sales had difficult going in an extremely poor market. The Supply Base also had a bad year because of reduced construction and drilling activity. However, a major long-term contract has recently been finalised and should provide a stable earnings base going ahead. A restructuring programme was undertaken during the year with annualised savings of at least $15 million being realised and the initiatives to increase efficiency will continue through FY 2016.


Financials_Pre-impairment (Source: Company Reports)
 
The year was extremely challenging as the price of oil fell by over 50% from USD 107 a barrel to the current levels of around USD 50. This is mainly due to the unexpected and unprecedented decision of OPEC not to rebalance the market by cutting oil production. Oil and gas companies reacted promptly by aggressive reductions in expenditure and the impact on the offshore oil and gas marine sector was adversely impacting vessel utilisation and intensifying competition for available work. Production support continues to be a key element of company strategy and is particularly important in the current environment. This will be an important part of the future market as LNG projects progress from construction to production.

Our View: 

We believe that the demand from emerging economies such as China and India which have rapidly become large consumers of oil and gas seem to ensure growth for this company in the future despite the possibility of lower demand from Western Europe and North America.


MRM Daily Chart (Source: Thomson Reuters)

Despite the uncertainty, we're convinced that this company continues to have upside potential and recommend a BUY for the stock at the current price of $0.545.
 

G8 Education Ltd

Recent Update considering Affinity Education: 

In the most recent development, child care centre owner Affinity Education Group Ltd (ASX: AFJ) provided updates regarding its potential takeover offers from G8 Education Ltd (ASX: GEM) and private equity business Anchorage Capital. Affinity lately announced that Anchorage had increased its bid to $0.92 per share from the previous bid of $0.89 which is significantly better than the G8 final cash offer of $0.80. The offer reflects a 15% premium to G8’s cash offer, as well as a 17.4% premium to G8’s off-market takeover offer, in which shareholders could receive 1 G8 share for every 4.25 Affinity shares. Interestingly, G8 also agrees that this is the best proposal and, keeping in mind that G8 already owns a stake of approximately 25% has agreed to vote in favour, provided conditions are met such as the successful arrangement of financing and provided a better offer does not emerge.



Results for half year FY15:

Results for the half year ended 30 June 2015 saw shares gave up early gains and after rising 5.8% following the half year results announcement. Net profit increased by 73% to $28.2 million as a result of a 66% jump in revenue to $310.9 million which demonstrated the strong organic growth profile. Investors had earlier been concerned that the acquisition-hungry G8 Education was expanding too fast because of its organic growth rate with almost half of the group’s 457 centres being acquired in the past 18 months. However, the company said that centres bought in 2011 have produced earnings before interest and tax (EBIT) growth of 20.4% in the first half of 2015 and that EBIT growth is averaging around 19.3% over five years. This is pretty convincing evidence to demonstrate that the company centres are capable of achieving double-digit growth rates and this should comfort many investors. What’s more, earnings per share growth continues to outpace revenue growth and is up 60% to 8.75 cents a share compared to revenue growth of around 67%.


Centre EBIT Growth (Source: Company Reports)
 
During the period, a total of 21 new centres were added by the group and, at the level of the centres, the corporate model continues to provide support and investment to enable the delivery of first-rate educational outcomes. Operating cash flow was strong at $ 35.4 million for the half-year and catch conversion continues to be good. Payments for businesses of $ 53.6 million represents the acquisition of the 21 new centres as well as other acquisition related outflows. Cash flow from financing activities declined by $ 12.8 million because of the combined impact of the underwritten DRP in January 2015 and the dividends paid during the period.

Our View:

In our opinion, the company looks well placed to achieve the consensus EPS forecasts for the year assuming that the split in earnings between the first half and the second-half is similar to what it has been in previous years. In our opinion, the stock is undervalued at the current P/E ratio of 17.3 and in the light of the potential growth, we see an upside in the stock price.


GEM Daily Chart (Source: Thomson Reuters)

Accordingly, we put a BUY recommendation for the stock at the current price of $3.13.


Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
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Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.

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