Mermaid Marine Australia Limited's (ASX: MRM) share price has fallen from recent highs of $4.10 to a closing price today of $2.28. Up until these recent falls, Mermaid Marine had outperformed the wider mining services industry, which in itself is not a significant achievement considering the significant share price falls within the battling industry.
The key reasons Mermaid Marine was able to outperform others in the industry included:
- A strong oil price which remains above U.S. $100 a barrel
- Key long-term contracts with some of the largest oil and gas producers in the world
- A management team that has a proven track record on improving earnings
- Debt to equity levels under 35%
So what caused the eventual share price fall to $2.28? In the recent weeks, two key events have taken place — the release of half-yearly results and the announcement that Mermaid Marine will acquire Jaya (a large Singapore-based competitor).
The half-year results were not terrible, but they did confirm that margins were being squeezed and as a result, despite a solid rise in revenue of $26 million (14.2%) profit before tax fell $5.9 million (29.3%). However much of the performance can be attributable to the delay in the commencement of key contracts, indicating that it is largely a timing issue and these revenues should flow through in the coming period.
One key highlight was the securing of major contracts that are likely to result in stronger financial performances in the coming years. Other highlights included gearing of only 32.2% and an increase in cash to $64.2 million. Management confirmed second half performance was likely to be stronger and noted the impending number of large Australian LNG projects to be constructed in the coming years. Net tangible assets per share as of 31 December 2013 rose to $1.72 or up 17.8%.
The second key event in recent weeks was the announcment that Mermaid Marine would acquire Jaya at a cost of $550 million. The acquision provides Mermaid Marine with immediate scale in the Asia Pacific region. The business comprises of 27 vessels in operation across southeast Asia, the Middle East, West Africa and more recently East Africa as well as six high specification vessels under construction and scheduled for delivery into the fleet in 2014-2016. The Jaya companies generated revenue of $121 million and EBITDA of $57 million for the 12 months ended 31 December 2013.
All things considered, I think the financial results were solid. Margins were always going to reduced, but to increase revenue provides comfort that Mermaid Marine will benefit when the industry picks up and margins return to longer term averages. That said, Mermaid Marine is still profitable and achieving reasonable returns on its many assets.
I am also a supporter of the acquisition of Jaya, I believe the scale it provides will assist Mermain Marine in becoming more cost-effective in running its operations. Significant synergies should be achieved, and it will be better placed to service the large customers it has on its books.
Foolish takeaway
Mining services companies have understandably been out of favour. But Mermaid Marine is operating in an idustry where its key commodity, oil and gas, has remained at historically strong levels. In a market offering little value, the recent pull back in the Mermaid Marine share price to prices not seen since 2009 offers a strong buying opportunity.
