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Dean Mico
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I manage a private investment fund in Australia known as The Edge Fund. I invest in the best Australian stocks using a value investing methodology. I overlay this with technical analysis to buy low and sell high. My website is
My company:
Edge Seven Pty Ltd
My blog:
Edge Seven Value Investing
  • ASX: MCE - Matrix Composites & Engineering Limited 0 comments
    Oct 2, 2012 5:44 AM

    Matrix Composites and Engineering Limited (ASX:MCE) is a company involved in the design, testing, manufacture, distribution and service of a range of engineered products in the oil and gas, and mineral resources industries.

    Matrix manufacture technically advanced products using composite syntactic foam and engineering plastics that have their origins from aerospace and defence industries. The main product line for Matrix is the manufacture of subsea buoyancy systems for use in the oil and gas sectors.

    Matrix Composites & Engineering officially began operations in 1999 and is located in Henderson, Western Australia.

    Does this business have a sustainable competitive advantage?

    1. Matrix Composites & Engineering are the market leaders in syntactic foam materials and technology
    2. In 2011, the company opened the largest and most technically advanced composites syntactic manufacturing plant in the world
    3. The new plant gives Matrix significant economies of scale leading to production cost advantages over its competitors. Matrix claim the new production facility has given them a number of operational efficiencies which provide greater output, shorter production times and superior product quality in comparison to its rivals.
    4. Matrix is the only company of its kind located in the Southern Hemisphere giving it a proximity advantage to the Asian marketplace
    5. Matrix has a focus on research and development in order to stay at the forefront of their industry by constantly evolving and improving their product range to meet their client's needs

    What are the risks facing this business?

    One risk to Matrix's future is that it is a 'lumpy' business. Orders when won come sporadically from their oil and gas exploration clients making it difficult to project future earnings with a large degree of certainty.

    A second risk is the cash flow drain on the company due to the nature of its business. It takes approximately nine months for Matrix to be paid from the time an order is received. That is, by the time they receive an order, manufacture the product, distribute it and then wait to be paid, the entire timeframe takes about nine months. This payment delay is partly responsible for the negative cash flow reported in the company's accounts for each of the past three years.

    - In 2010FY, cash flow was negative $15.4 million

    - In 2011FY, cash flow was negative $46.2 million

    - In 2012FY, cash flow was negative $18.3 million

    To be fair, the company did spend in the vicinity of $60 million building their new plant which does equate for a fair chuck of these negative amounts.

    The high Australian dollar also impacts Matrix profitability which seems to have caused a constant head wind in recent years.

    Is it run by able and trustworthy management?

    The companies managing director, Aaron Begley without question is very knowledgeable and operationally astute about his business and the nuances of his industry.

    However, it is not certain that management always acts in the interest of all shareholders. An example of this was seen in April 2011 when the company paid a 3 cent per share dividend equating to paying out a touch over $1.7 million out to shareholders. The same month, the company came back to the market asking for $36 million when they announced a capital raising to complete the building of the new high-tech facility at Henderson.

    Is it trading at a bargain price?

    Rank2012 Actual ValuationToday's Share PriceMargin of Safety2013 Forecast Valuation2014 Forecast Valuation
    Gold 5$0.64$2.19-29%$1.70$2.79

    *Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

    Here is a chart of the company's share price since it listed on the ASX in November 2009.

    (click to enlarge)


    In summary, Matrix Composites & Engineering is a business with operational competitive advantages over its rivals. It has been profitable in past years but unprofitable in the 2012 financial year. The company has struggled with cash flow due to the combination of the nature of their business and the cost of building their new facility. Given a few years, the soufflé that is Matrix has the potential to rise again with a consistent and sustained level of new orders.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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