Company: Matrix Composites and Engineering Ltd
ASX Code: MCE
Issue Price: $1.00
Market Capitalisation: $64m
Pumping out over 200 million barrels of oil equivalent last year, Woodside Petroleum’s North West Shelf Project off the coast of Western Australia is our nation’s leading energy production centre. Since inaugural LNG cargoes were shipped to Japan in 1989, it has stood as the largest single resource development in Australia’s history.
But that mantle could soon fall to another LNG development in the region – Chevron’s $50bn Gorgon project. The passing of the baton to another offshore project is a testament of the structural shift in the oil & gas industry towards deep sea developments. While these projects involve much higher costs than onshore developments, historically high oil prices justify the trade off.
Currently trading around US$77/bl, oil has more than doubled off its lows earlier in the year. Its recovery and Chevron’s ‘go ahead’ for Gorgon has put a rocket under offshore service providers such as Mermaid Marine (MRM), and Neptune Marine (NMS), with shares in both companies rallying over 100% so far during 2009.
Matrix Composites and Engineering is also poised to capitalise on the trend. Founded in 1982, the company has emerged as a global leader in the production of offshore oil & gas subsea buoyancy systems. Its range of advanced, proprietary materials are used to manufacture customised products that support the weight of underwater equipment and infrastructure. For example, the company’s ROV buoyancy systems neutralise the underwater weight of remotely operated vehicles (ROV’s) in order to make them more manoeuvrable. But rather than delving into the science behind these products, we like to let the numbers do the talking.
In this instance, they’re speaking loud and clear. During FY09 Matrix recorded revenues of $54.3m and a net profit of $3.1m. Subsea buoyancy systems accounted for 89% of sales and are fuelling strong growth, with revenues increasing at an annual compound rate in excess of 40% for the last five years.
With a full order book and recent capacity upgrades set to take effect, management are forecasting revenues and profits to more than double in the coming year. But rather than ‘cashing out’ while the going is good, management have issued $15m of fresh equity in order to support the company’s next phase of growth. Matrix currently operates out of seven facilities spread across metropolitan Perth, but plans to consolidate them under one roof by constructing a purpose built facility strategically located in the Australian Marine Complex at Henderson, WA. The project is expected to double production capacity and deliver significant operational synergies when complete.
Provided oil prices remain at levels that encourage deep sea exploration, we see the potential for a sustained period of strong growth to emerge. Listing on a forward PE of 8.4 and a 4% dividend yield, new investors appear to be getting a good deal in light of Matrix’s track record and outlook. The Aussie Dollar’s strength poses the most significant risk. The first four months of the year have seen the $AUD/US exchange rate average 85c, whereas management forecasts for FY10 are based on a rate of 80c. Every 5% appreciation above that mark has the potential to dampen profits to the tune of $2.1m (or 27%), however the company informs us that hedging arrangements in place should protect it against these headwinds.
For prospective investors that missed out on subscribing to the IPO, it may be worth following Matrix’s fortunes quite closely. We’ll be monitoring for potential entry points, but share price strength in its early life should be taken as a positive sign of things to come.
Tim Morris is an analyst at wise-owl.com. Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.
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