Despite the bounce in US shares this week – which experienced five straight days of gains to finish the week 4.7% stronger – Aussie investors remained cautious, with the ASX200 finishing 1.1% lower.
Two logistics giants, Toll Holdings and Asciano, appear on our buy list this week (see below for the full list). Also, beaten-down blue chips like Qantas, Woolworths, Boral and Myer are present, as are a diverse range of smaller companies including Collins Foods, Invocare, Echo Entertainment, Carsales.com and Thorn Group.
One company on the buy list is a heck cheaper than it was a few months ago – Matrix Composites & Engineering. Despite being the market darling – surging 900% in just 18 months – Matrix has been hit hard; its share price has more than halved over the past two months. Could this be a fantastic opportunity to get on board a growth stock at a bargain price?
Matrix Composites & Engineering (MCE)
| Closing price||$3.67|
| Weekly change||-$0.36|
Austock – BUY, price target $6.75
Intersuisse – BUY
Chart: Share price over the year to 16/09/2011 versus ASX200 (XJO)
There are no two ways about it, Matrix Engineering has been hammered. Any number of analysts and brokers were talking this stock up last year. Little wonder analysts were keen on the stock – Matrix Composites & Engineering (MCE) rose from its listing price of $1.00 to $9.76 on 9th March 2011, a staggering ten times in less than a year and a half. But the stock has done a complete about face since then, plunging 62% in just six months with more than 50% of the share price drop coming since July 5th. MCE closed at $3.67 as at close of trade on Friday 16th June, just off the yearly low.
Up until March the stock had done nothing but head north since listing in November 2009, when it closed at a 36% premium to its listing price on day one. Austock Securities is one of four brokers we tracked down who currently list MCE as a BUY, although it must be noted that Austock was also the lead manager in MCE’s $36 million capital raising.
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. Its CEO is Aaron Begley, son of the company’s founder Max Begley.
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 raise capital for its $64 million plant in Henderson, WA. The successful IPO and stellar performance put the company 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. The plant custom-designs foam buoyancy constructions of any shape or size for its multinational oil and gas clients.
MCE was meant to gain from an increase in capacity from the new plant; it is one of only four companies worldwide that provides buoyancy products to the offshore oil and gas industry. However the new plant is behind expectations, there is pressure on margins and new contract wins are not coming through as thick and fast as expected.
Company Investor Centre: Matrix Composites & Engineering
MCE reported FY’11 NPAT of $33.6m and underlying NPAT of $34m, below its guidance of $35m – $36m, although up 85% on pcp. This was below Austock’s slightly higher forecast of $36.5m.
The disappointing result was disastrous for the share price amidst global sharemarket chaos. EPS growth was more subdued, but still impressive at 56% for FY’11. Guidance is for 20% revenue growth in FY’12 and for margins to be similar to the FY’11 result. The result delivered unwelcome surprises, including lower future margins, the Henderson plant behind expectations, a low order book and lack of detail on cashflow.
Austock’s Heath Andrews says that MCE is the most efficient, highest quality producer in the industry in terms of production efficiency and automated production techniques and he doesn’t think that the market has priced this advantage in. “The market has recently been characterised by uncertainty, and MCE has been aggressively sold off,” says Andrews. “We believe the long term outlook for MCE is for high growth, with deep-sea oil and gas remaining positive. Due to poor investor relations, MCE could get sold off further, however, if you are thinking of selling, you could well be at the low point. The open tenders is at a record. If MCE grow their order book, it should recover (now cheap). We retain our Buy call.”
However Andrews warns that there has been a lot of hot money in the stock as it rocketed skywards. “An investment in MCE is about forward earnings and the “quick buck” money is leaving…we believe those investors prepared to look through short term noise will be rewarded.”
Andrews is not wrong, the quick buck certainly left in a hurry. This can be attributed to mismanagement of expectations, which not only missed forecasts but also failed to explain exactly why. As a direct result of this Andrews says that the stock has been “sin-binned” due to a lack of investor confidence, which could send it even lower before it ultimately recovers.
For James Samson, of Lincoln Indictors, Matrix Composites & Engineering is significantly undervalued. Closing at $3.67 on September 16, Lincoln’s price target is more than double. Samson notes that the company’s main product is the riser buoyancy module, which provides buoyancy to subsea drilling lines. “The strength of this product lies in the intellectual property of the design, and Matrix is experiencing strong demand at present,” Samson says. “The company has just completed construction of a new facility, enabling it to lift production and lower the cost per module. This new facility provides the company with a cost advantage over competitors in what is a globally growing market.”
Cameron Bell from Intersuisse also has a buy on MCE, despite the lower than expected results. He also believes that the engineering products maker is now trading at bargain rates. “Although the company needs to win some contracts, management expects 20 per cent revenue growth this year,” he says. “The stock was trading on just 6.9 times our full-year 2012 earnings forecast on September 14, 2011…for a high growth stock, that’s real cheap.”
With a huge amount of heat coming out of the stock, investors must be thinking that brokers are right – the stock is looking cheap. However several risks hang over the company. New contract wins will most likely assuage investors’ fears, however this does remain as one of the key risks – should new contracts not eventuate the big end of town will be unforgiving.
The other risk is the oil price. Deep sea oil and gas is high on the cost curve; if the price of oil falls, demand for deep sea products may head in a similar direction. There’s also pressure from competitors cutting into MCE’s market leading position.
Brokers like the stock, but then again they liked it when it was hovering around $10. If you’d followed their advice back then you’d be sitting on a pretty loss right now.
Having said that, if it was a buy at $10, then it’s worth taking a closer look now that the shares are trading at almost a third of the price. Will its shares shoot up the charts overnight? Unlikely. But this is certainly a stock to watch – notably, keep an eye on developments with the Henderson plant and any new contract wins.
Stock code: MCE
More news: Matrix Composites & Engineering Limited
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