- Mermaid Marine delivers strong profit result
- Brokers expect more growth in FY12 as oil and gas activity expands
- RBS upgrades to a Buy rating on valuation grounds

By Chris Shaw

Profit for FY11 of $43.2 million for marine services provider Mermaid Marine ((MRM)) was an increase of 37% relative to FY10, a result better than most in the market had been expecting. The result was delivered on a 49% increase in revenues, meaning margins fell slightly during the period.

RBS Australia notes the fall in margins was the result of a larger mix of lower-margin chartered vessels during the period. While this trend is expected to continue, UBS expects Mermaid Marine will be able to continue to deliver solid earnings growth.

This is due to strong demand for Mermaid's service from LNG projects along the North West Shelf. As examples, Macquarie notes the Gorgon and possibly the Wheatstone gas projects are proceeding, while other opportunities include the Macedon, Inpex, Pluto-2, Sunrise and Browse projects.

It is not only the number of projects that is a positive in the view of Macquarie, as the size of projects under consideration is also favourable in terms of the potential boost to earnings for Mermaid Marine. This is especially the case given Mermaid's strong position in the oil and gas service market in Western Australia.

Another plus in Macquarie's view are reasonable barriers to entry in the Australian vessel market, which includes a union requirement of Australian crewed ships. Safety regulations and high mobilisation costs given Australia's relatively isolated position are other barriers to entry.

Vessels accounted for 56% of earnings for Mermaid Marine in FY11, while supply base operations accounted for the other 44% of profit. An extension of Mermaid's wharf facilities is generating new exploration business, so Macquarie expects continued solid earnings growth from the supply base operations as utilisation rates increase.

While the full year result did not include specific guidance for earnings in FY12, RBS notes management at Mermaid Marine did offer positive outlook commentary. To reflect this and the result, earnings forecasts across the market have been lifted.

In earnings per share (EPS) terms RBS has lifted its estimates by 7-8% for FY12 and FY13, while both Macquarie and UBS have lifted their numbers by a smaller percentage. Consensus EPS estimates for Mermaid Marine according to the FNArena database now stand at 23c and 25.3c respectively, with Macquarie suggesting earnings risk remains to the upside.

When added to the strong full year earnings result, RBS suggests recent weakness in the Mermaid Marine share price has increased the value on offer. As a result, RBS has upgraded to a Buy rating from Hold previously, while its price target is essentially unchanged at $3.55.

Most of the market agrees with the newly positive view of RBS, as the FNArena database shows Mermaid Marine is Rated Buy four times and Hold once. This comes courtesy of Deutsche Bank, the broker arguing while there is potential earnings upside this is reflected in the share price at current levels.

The less aggressive view of Deutsche Bank is reflected in its price target, which at $3.15 is some way below the consensus price target according to the FNArena database of $3.50. Targets for the other four brokers to cover Mermaid Marine range from $3.40 to $3.80.

Shares in Mermaid Marine today are slightly lower, trading down 3c at $3.11 as at 1.45pm. Over the past year the stock has traded in a range of $2.42 to $3.44. The current share price implies upside of around 12% to the consensus price target in the FNArena database.