The Q1CY2009 results of Seamec were much ahead of our estimates on account of a strong top line growth and further improvement in margins.
The revenues for the quarter grew by 149% to Rs100.1 crore, as all four of its vessels were deployed during the quarter against just two in the same quarter of the last year.
With better utilisation, the margins, both on year-on-year and sequential basis, grew to 65.5%, leading to a 247.8% growth in its operating profits to Rs69.6 crore.
For the quarter, the adjusted profits grew from Rs4.8 crore (adjusted for dry-docking expenses and provisions) to Rs62 crore in the current quarter.
Currently, the contracts for all the vessels are in place and all its vessels would be operational for the first half of the fiscal. The company has recently received a one-year contract for Seamec II, though at lower rates, while it has also received a two-month contract for Seamec Princess, starting May 15, 2009.
Going forward, in the wake of lowering global exploration and production (E&P) capital expenditure (capex), the deployment of assets would also be a challenge. We have already built in the likely softening in the rates into our estimates for CY2009 and CY2010.
There is no dry-docking expected for any of its vessels in CY2009, while dry-docking for Seamec I is due in CY2010.
We are slightly fine-tuning our CY2009E sales estimate due to a stronger dollar, but are raising our profit estimate by 18.2% on account of strong improvement in the margins. We are also introducing our CY2010E earnings estimate in this note.
For CY2010, Seamec I is likely to go for dry-docking, while currently the company has contract only for Seamec II, which would expire in June 2010.
In view of the tough outlook on the industry and softening rates, we expect the company to report a 7.5% decline in its revenues, while the margins are also likely to contract on a year-on-year basis on account of lesser utilisation. Consequently, we are building in a profit decline of 21% year on year (yoy) in CY2010.
On the valuation front, the stock appears to be trading at an extremely attractive valuation of 2.4x CY2009E earnings and 3.1x CY2010E earnings. The valuation is particularly attractive given the company’s strong return ratios and debt-free status.
Moreover, at the end of CY2008, the company had cash on books to the tune of Rs63.5 crore, which works out to Rs18.7 per share.
Further, on the back of strong performance, we expect excellent cash inflows for the company, with the cash flow from operations expected at Rs121 crore for the current year. We maintain our BUY recommendation on the stock with a price target of Rs197.