Investment Matters

MMA Offshore: an update

First Samuel clients invested in MMA in its recapitalization in December 2017.  Since that time we have been building a position, using the prevailing conditions and share prices to gradually build a mid sized holding in clients portfolios. 

The initial investment was made at a 53.6% discount to the (written down) value of the hard assets (a young fleet of offshore marine support vessels). 

The thesis at the time was that the industry was beginning to come out of a once-in -a-lifetime slump, caused by the significant fall in oils prices of 2014/15 and the dramatic slump in offshore oil production and exploration. 

Fast forward to today and MMA is about to record its third year of EBITDA improvement, and we expect it will possibly guide to significant further improvement in 2020.  The recovery is now well established and evident globally.

MMA EBITDA

                                             Source: Company Reports, First Samuel

 

We believe this improvement has substantial room to continue and assess the current asset base of MMA to be capable of delivering towards $80m of EBITDA as the cycle continues on its multi-year recovery.  This is +200% greater than the expected +50% improved FY19 EBITDA. 

Further, and as in the Emeco case study, we believe that poor market conditions often create unique value accretive opportunities for companies that can be bold enough to take them.  Most investors and companies don't like raising equity when their share prices are substantially below fair or intrinsic value, however for those with an ounce of gumption, it can be hugely beneficial to buy assets at this (low) part of a cycle - provided the assets acquired are cheaper still than the ones you own (and preferably of equal or higher quality). 

Ultimately by doing this, companies can emerge from a down cycle stronger and ultimately more profitable and valuable than they otherwise would have been on a per share basis. Investors will own a smaller share of an ultimately bigger (and hopefully better) pie.

In this regard, we were delighted to see MMA announce this week the acquisition of Neptune Marine Services’ business for ~$18.5m.  Its first M&A step of this recovery. 

This is a small strategic acquisition (mostly for shares – minimum price $0.20cps) which will diversify MMA’s business, and provide a strong platform to grow their sub-sea service offering. The combined business has significant leverage to a recovering offshore and sub-sea market.

Neptune made a nominal EBITDA In FY19 of $0.40k on $84m of revenue.  However in the last cycle, this business was making $11m of EBITDA consistently off ~$135-136m of revenue.  The demand for these services (being inspection, maintenance, and repair to the oil and gas, marine and renewable industries) will rebuild and we expect these types of numbers to be hit again.

Additionally, this acquisition will release ~$2m of cost synergies which will be maintainable, and make the acquisition quickly EBITDA accretive, and ultimately more valuable. 

We have been unable to trade MMA on clients behalf in recent months, as we have been aware and engaged in this transaction. 

Now free of this restriction we did take the chance to buy more shares once it started trading post announcement.  

We like the way the MMA recovery is occurring, and whilst we haven't had any substantial benefit from the recovery yet, we see substantial upside as the equity market catches up to both the recovery in play and also the strategic (and accretive) direction of the business. 

- Dennison Hambling