Seamec Princess

Company is Cash Pile Of Rs 250 Cr May Sweeten Its Current Valuation

 

SEAMEC Princess shed a gain of 5% in its stock price last week, following its announcement about the extension of contract for its fourth vessel, Seamec Princess. The scrip has stagnated at a time when the Sensex gained nearly 4%. 

   However, judging from a slightly longer-term view, the Seamec scrip has outperformed the broader market over the past one year, rising nearly a five-and-a-half times during which time the Sensex doubled. The gains have mainly come from a strong jump in earnings, while its valuation stagnated. Seamec's per share earnings for 2008 stood at Rs 13.9, which has jumped five-fold to Rs 70.88 now. But the company is still being valued at around 3.5 times its earnings, similar to the year-ago period. 

   At a time when the valuation of the entire market has improved, Seamec's failure to attract a better valuation raises doubts about the sustainability of its future performance. The company's profits in 2010 are expected to take a substantial hit, as its vessels go on dry-docking and with charter rates weakening. 

   Dry-docking of a vessel, which is a regular characteristic of this industry, results in heavy expenditure on the one hand and revenue loss, on the other. Similarly, the company's recent contract to charter out Seamec II vessel at a lower rate compared to 2009, hints at a persisting weakness in the industry. 

   To its credit, the company has done extremely well during the past few quarters with substantially better profits compared with the year-ago period. The net profit during the 12-month period ended September 2009 stood at Rs 240.3 crore against a net loss of Rs 23.3 crore earlier. With all its four vessels working, even the December 2009 quarter is expected to be equally profitable for the company. 

   However, the profitability pattern of the one year spurt followed by an year of dip in profits is a regular characteristic for this industry. With just four operating assets, even a single vessel going off work has major impact on the company's bottomline. The company's strategy to add more assets to its fleet in future will reduce this heavy dependency. 

   The company remains debt-free and is expected to be holding a cash pile of close to Rs 250 crore when it ends its financial year in March 2010. This not only sweetens the company's current valuation markedly, but also increases chances of another asset buyout. The industry's outlook is also expected to improve in 2011 along with general economic growth. Although the company's market capitalisation is unlikely to move up significantly from its current level in the near future, long-term investors should keep an eye on this scrip, which could offer a great investment opportunity in mid-2010.