This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below. You should consider your financial situation and goals before making investment decisions.
Note - the below company trades low volumes (e.g. $40k per day) so may be difficult to accumulate a large position & in-turn exit such a position .
What does $MCE do exactly within the subsea space?
For regular readers of this space; I do not cover anything mining but I do delve into mining services from time to time; hence the interest in $MCE
$MCE engineer/manufacture services and material technology solutions to the offshore oil and gas industry and more recently offshore wind space
For anyone confused about what that means, I think the below photo depicts what type of buoyancy devices. The terminology management often uses include 'risers, strakes & ROVs as shown below.
Subsea - 77% of Revenue; Cash should follow Order Book
The core of your thesis with $MCE has to focus on their Subsea oil & gas segment. The Corrosion Tech/Materials segments are logical cross-sells and have helped cash runway, but I purposely spent less time on them as it is currently a smaller portion of the business
As a reminder, Subsea O&G production tends to have tougher economics than onshore shale drilling. This is because deepwater drilling requires huge upfront outlays, and promises returns that extend over years or even decades which is not desirable depending on the oil price
This being said, for over 2yrs, the oil price has been stubbornly high
Bolstered by this price, and due to other factors, this has bolstered the number of offshore rigs. For this reason, there is a deep pipeline of other projects that are bidding on:
Note: The number of subsea rigs it is still a lot less than onshore/shale rigs (3x smaller)
Specifically for buoyancy devices for these newbuild subsea rigs, $MCE products are the last component of the rig construction which means:
There is a delay between oil prices and $MCE revenue picking up
There is a small pool of direct competitors given the TAM of onshore O&G engineering services is larger
$MCE revenue can be very clumpy and getting a true read on margins is hard. For subsea only - it can be as high as 30%. So in theory they could deliver >$30M of GP over FY23 & 24
Finally, whilst buoyancy devices have applications in offshore wind I have not focused on them for this analysis
Corrosion - 22% of Revenue, Lower margin distribution play
I consider this segment provides more 'downside' protection
$MCE is the exclusive distributor of Humidur® Coatings in Australia, New Zealand and PNG
The Humidor product was developed by the Belgian company Acotec over 35 years ago and like most distribution agreements, the majority of the economics goes to the producer of the product
Matrix has managed to get key customers outside of the O&G industry (e.g. Fortescue, Defence, etc.) to buy their solvent-free epoxy coatings, anti-corrosion coating; siloxane hybrid top coating
Composite materials - 4% of Revenue but growing
I am not technical enough, however, their syntactic foam is like an "embedded lottery ticket" insofar as the corrosion-resistant and lightweight nature is appealing. What's more - R&D is often funded by the client order
That being said, it is early day for these products;
What financial metrics matter for a hyper-cyclical business
Forming earnings estimates for $MCE is challenging given (a) the insane operational leverage that comes from their clumpy order book and (b) whilst oil prices have been relatively elevated it is tough to extrapolate out. A few key considerations:
Income & Cash Conversions
As a start, this company screens terribly. Not since 2016 has $MCE made positive OpCF. Not since 2014/15 have they been profitable
NPAT in FY23: $MCE delivered $9m of NPAT (i.e. driven by the reversal of impairment). Based on revenue/order book - they should deliver higher OpCF in future periods
Cash conversion to FY23: their gross cash levels had grown to $23.5m (up from $20.0m)
Possibility to grow order book: Whilst they do not have many competitors in this specailised space, there is evidence of retention (e.g. winning two Subsea 7 contracts in the last 12 months)
Tax effective: >$100m of DTA means their effective tax rate will be very low
Management and fundraising history
In 2022-3, $MCE did some fairly serious fundraises:
Mar'23 - 1-for-3 Entitlements Offer
Dec'22 - Collins St took $7.6m of convertible notes with a strike price of $0.35 in Dec'25
Performance Rights: Management have had to incentivised with a new batch of performance rights because the prior batch expired worthless
Expired shares
New batch of shares
Conclusion - A growing number of committed subsea projects has seen $MCE's order book swell and in turn will increase their cash position. Whilst this company has limited fixed assets it is a 'deep value' play in the sense that it is trading 5.0x historical earnings and will likely generate >$10m of OpCF in the next twelve months.
Unfortunately - $MCE is too cyclical and illiquid for me. Their order book can quickly dry-up & their >$23m cash balance could be eaten up by CSVF redeeming their debt in cash & the c.$8m p.a. opex base.
On this basis, I am sitting this one out. However, I hazard to guess that the current oil environment will be very profitable for $MCE holders who have the gumption to hop in.
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