MoneyTalks: Speculative Buy on MCE as oil drills pick up; while GNG could profit from energy transtion
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Euroz Hartleys has initiated coverage on advanced materials manufacturer, Matrix Composites and Engineering (ASX:MCE), with a Speculative Buy recommendation and a price target of 45c (vs current price of 26c at time of writing).
MCE is a West Australian-based manufacturer of specialised buoyancy modules, predominately used for deep sea drilling rigs and exploration.
The business has 3 key divisions, which the company defines as:
Subsea Buoyancy (77% FY23 Revenue) – SURF, Deep water drilling and well construction and offshore wind,
Corrosion Technology (20% FY23 Revenue) – Anti-corrosion coatings and application (orders largely recurring),
Advanced Materials (3% FY23 Revenue) – Material solutions for renewables, defence and resources industries.
The company also boasts a 22,000m2 facility located in Henderson, Western Australia, which has the capacity to produce buoyancy modules in the region of $240-$250m per annum (operating 11 months per year).
Euroz believes that after a period of global under-investment in the oil and gas sector, the outlook looks set for a period of strong demand for MCE products. Various forecasts suggest that activity in the oil and gas sector will increase consistently through to mid 2030s.
In addition, Matrix could capitalise on the huge growing demand for offshore wind over time. In Australia, this segment is expected to pick up rapidly following the announcement of offshore wind projects aimed at adding 48GW of power supply.
The company could also diversify its revenue base through the emerging advanced material segment, where it has partnered with the likes of FFI, RIO Tinto and Woodside Energy for manufacturing trials.
On the financials side, Euroz forecast that Matrix could break even by FY24 based on the company’s $70m of buoyancy orders. (Buoyancy modules provide the necessary buoyancy to drilling risers, ensuring they remain upright and do not collapse under their weight or the weight of the drilling mud).
Euroz also likes Matrix because the industry has high barriers to entry. The few global competitors the company has are located far away in the Northern Hemisphere, which provides MCE with operating advantage servicing ASEAN regions.
“Our Speculative Rating revolves around MCE’s ability to capture a share of emerging offshore wind market, and convert existing SURF buoyancy pipeline driving long term earnings growth.
“With breakeven earnings now somewhat secured on the existing order book, and the company well funded, we are comfortable with the balance sheet position to support near term work and opportunities,” said the note from Euroz.
Meanwhile, Taylor Collison has an Outperform rating on GR Engineering Services (ASX:GNG), with a price target of $2.52 (vs current price of $2.13 at time of writing).
GNG provides engineering, design and construction services to the mining and minerals processing industries. The company has a niche in Western Australia serving a variety of explorers and producers, and has over time developed a reputation as a quality operator.
The company generates revenue from initial pre-feasibility studies through to construction and management of process infrastructure required at the mining site (i.e., crushing stations and tailings pipelines etc).
Whilst not the exclusive funnel of work, feasibility studies act as a leading indicator to securing future services and construction contracts, according to Taylor Collison.
Currently, GNG is working on around 30 studies across a range of minerals and jurisdictions, which is close to the highest number of projects in the company’s history.
Management has also flagged that the pipeline of work is very strong. This can be validated by the number of studies which have been recently completed or are ongoing, including Poseidon Nickel (Black Swan), Sarytogan Graphite, EcoGraf, AusGold, Peel Mining and Australian Vanadium.
“GNG has the capacity to run between 8 and 15 projects concurrently. In our opinion there is a sufficient pipeline for GNG’s services well into FY25,” said the note from Taylor Collison.
“GNG currently trades at 10.8x FY24 PE, but we think this represents an opportunity.
“The current demand for clean energy is likely to be prolonged and somewhat independent of the business cycle, which usually influences commodity prices.”
The views, information, or opinions expressed in the interview in this article are solely those of the brokers and do not represent the views of Stockhead.
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