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Stock: Matrix Composites & Engineering

Stock code: MCE

Share Price: $8.90 (as at Friday 8th April, 2011)

Broker buys: 

Patersons Securities (3/4/2011, share price was $9.05 that day)

Austock Securities (4/4/2011, share price was $9.05 that day)

Chart: Share price over the year to 08/04/2011 versus ASX200 (XJO)

Any number of analysts and brokers were talking this stock up last year. And they haven’t been proven wrong – Matrix Composites & Engineering (MCE) has risen from its listing price of $1.00 only 17 months ago to $9.95 a month ago on 4th March 2011, a staggering ten times its listing price in less than a year and a half. It was trading at $8.90 as of close of trade on Friday.

The stock has done nothing but head north since closing at a 36% premium to its listing price on day one back in November 2009, and analysts are predicting more of the same. Both Patersons Securities and Austock Securities have listed it as a BUY in the past week, although it must be noted that Austock is also the lead manager in MCE’s $36 million capital raising. This is not Austock’s only disclaimer, as it also has a risk rating of HIGH in its latest broker report. As always you need to be mindful of your appetite for risk when reading broker recommendations and considering these stocks for your portfolio.

Austock Securities broker report: Matrix Composities & Engineering

Company Description

MCE, which was founded in 1982 and is based in Western Australia, manufactures and sells foam buoyancy and polyurethane products, as well as fabricated metal products in Australia and overseas. The company is divided into two areas:

1. Advanced Materials, which designs, manufactures, and supplies a range of products (such as buoyancy systems and pipeline insulation) to the offshore oil and gas industry, as well as solutions for military applications.

2. Heavy Engineering, which manufactures and supplies offshore structures (such as cranes and winches) to the oil and gas industry, as well as the mining and mineral processing industries. The company was founded in 1982 and is headquartered in Malaga, WA.

The IPO at the end of 2009 was designed to raised capital for its $64 million plant in Henderson, WA. The successful IPO and stellar performance of the company put them into the spotlight; now it’s crunch time for MCE as operations are underway at Henderson in what is the world’s biggest buoyancy plant, where it can custom-design foam buoyancy constructions of any shape or size for its multinational oil and gas clients.

Patersons notes that MCE is set to gain from its increase in capacity from the new plant and the fact that it is one of only four companies worldwide that provides buoyancy products to the offshore oil and gas industry. Austock describes MCE as ‘an oil & gas services pure play’. MCE is leveraged to deep-sea oil and gas, so continued instability in the Middle East and nuclear concerns following the Japanese disaster can only help its cause.

Company Investor Centre: Matrix Composites & Engineering

Financials

Earnings

2011 is shaping up as a solid year for MCE. Less than two months ago the company announced its earnings results for the six months ending December 31, 2010. Net profit after tax soared 159% to $19.25 million for the six months to Dec 2010, up from $7.44 million for the first half of the year.

EBIT was $25m for FY2010 (up from $4m for FY2009), and is predicted to more than double to $54 for FY2011. Continued growth is expected in subsequent years with the new facility in Henderson forecast to double existing production capacity and reduce costs. NPAT was $A18.16 million for the 2010 financial year, an increase of almost 140 per cent on its prospectus forecast of $7.6 million. 

Revenue

Revenue more than doubled (up 112%) in the second half of 2010 to AUD 92.37 million from AUD 43.54 million for the first half of 2010, and EPS was 26.9 cents, up from 14.2 cents. 

Dividends

MCE declared that an interim dividend would be paid, increasing the dividend payment from 2 cents to 3 cents fully franked.

Company Earnings Report: Matrix Composites & Engineering Half Yearly Earnings Report – Dec 31st, 2010

Company Earnings Report: Matrix Composites & Engineering Full Year Earnings Report – June 30th, 2010

Valuation

MCE’s market capitalisation is $681 million based on a closing price of $8.90 and 76.5 million total shares outstanding.

Austock Securities has attributed a DCF valuation of $10.91, see their valuation summary and financial summary and forecasts below. 

 

Source: Austock Securities Research Report 4th April 2011 – Matrix Composites & Engineering

Institutional Placement

Last Friday MCE successfully completed an Institutional Placement of 3,550,000 shares (4.9% of issued capital) at $8.50 per share to raise $30.175 million. The company said that the Institutional Placement was heavily oversubscribed ‘with strong demand from new and existing Australian and Asian institutional investors’. MCE’s CEO Aaron Begley commented on the placement: “We are delighted with the strong support shown by institutional investors for the Institutional Placement and the level of oversubscriptions is an endorsement of Matrix’s growth strategy”.

Analysts

Mike Bigwood of Patersons Securities who has a buy recommendation on MCE, believes that the future is rosy for this global company and states that it is one of his ‘key picks’:

“MCE is an engineering company whose main business is providing buoyancy products to the offshore oil and gas industry. MCE is one of four global companies providing these products. With improving production capabilities from a new manufacturing facility in WA, and a forecast return on equity of between 40 and 45 per cent for 2011, MCE remains one of my key picks’.

Heath Andrews from Austock Securities says that ‘MCE can double sales via its Henderson plant. The capex is spent. It also has the option of continuing to operate the Malaga factory – not many companies offer growth potential >150% without further large capex. Based on MCE’s IPO price and FY’10A NPAT, it listed at a ridiculously cheap multiple of 2.7x’s NPAT. Share price performance is not so extreme when this is factored in.’

However he has the risk rating on this stock as ‘HIGH’ and states that the risks are ‘that reduced demand would put pressure on the sell price and lower margins, plus sales forecasts of new products may not eventuate’. On top of this the a lower US$ could impact the company when hedging runs off. He sees the opportunities as being that ‘the new factory offers scale and other cost savings which could make MCE leveraged at the bottom line’, it is possible for new products to be more successful than forecast, so there is potential for MCE to surprise to the upside.

A third analyst, Michael Feller, of Lincoln Indicators was keen on this stock back on 15th February, when the stock was trading at $8.13. TheBull’s Anthony Black interviewed him in SECTOR SCAN: The Best Oil Stocks On Rising Crude. As Black stated, Feller expects earnings growth to continue unabated. The company posted an $A18.16 million net profit after tax for the 2010 financial year, representing an increase of almost 140 per cent on its prospectus forecast of $7.6 million. 

Conclusion

With such a stellar run since listing less than 18 months ago – a $10,000 investment in the IPO would be worth almost $100,000 today – investors must be wondering whether the MCE share price has run its course. However some analysts are still bullish on this award-winning Australian company that has carved out a niche for itself and set up the biggest buoyancy production plant in the world. Austock’s forecasts have MCE tripling earnings over the next three years. Having said that, in the same report Austock has noted that its risk rating on MCE is HIGH. While there may be much more to the MCE story, a stock that’s run this hard, this fast must be considered with caution.

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.