Having previously been the market darling – surging 900% in just 18 months post listing – Matrix Composites & Engineering has been hit hard; its share price has plummeted by 60% over the past six months. While brokers were bullish on Matrix back when its shares were basking in the glory of $10 a share, they continue to be bullish today as the share price crawls across the bottom of the price chart, currently sitting at $3.59. Investors want to know – is this stock is a true bargain?

Matrix Composites & Engineering (MCE)  

Share Price: $3.59 (as at Friday 7th October 2011)

Charts: Matrix Composites & Engineering Limited

More news: Matrix Composites & Engineering Limited

Broker Calls

Austock – BUY, price target $5.15 (down from $6.75)

Intersuisse – BUY

Lincoln – BUY

Patersons – BUY

Chart: Share price over the year to 7/10/2011 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 by 60% in the last six months.

MCE’s yearly low is $3.09, and by COB Friday 7th October the share price had climbed somewhat to $3.59. We tracked down four brokers who currently list MCE as a BUY.

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. 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

Financials

MCE reported FY’11 NPAT of $33.6m and underlying NPAT of $34m, below its guidance of $35m – $36m.

The disappointing result was disastrous for the share price amid global sharemarket chaos. Guidance is for 20% revenue growth in 2012 and for margins to be similar to the 2011 result.

Company Earnings Report: Matrix Composites & Engineering Full Year Earnings Report – June 30th 2011

Analysts

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 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. Lincoln’s price target is more than double its current share price. 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.”

Risks

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.

Conclusion

Brokers like the stock, but then again they liked it when it was trading at $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 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 stgelopments with the Henderson plant and any new contract wins. 

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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