Views on MCE?, page-23

I personally don't put a whole lot of value in MCE's diversification push. For starters, it's impossible to quantify and, therefore, very difficult to ascribe a value to. Secondly, they've been publicly saying for years that they're attempting to push into other non-oil industries yet they haven't had much success to date, which suggests to me that it's unlikely to form a large part of their business in the foreseeable future. I see their diversification push as some sort of ineffable and unquantifiable potential small future upside, but don't put any material value on it. An investment case for MCE based on where the business is today rises or falls on your belief that there will be an eventual recovery in sales of their buoyancy products constructed for floating rigs.

The share price of MCE has kicked up a bit lately, presumably on optimism around oil prices and the increased stake of Forager, but I personally think those that are getting excited now are potentially overlooking how slow a recovery might be for MCE. The principal reason I say that is because of the dire financial state that MCE's customers (ie rig operators and ship builders) are in - MRM is a locally listed example, but the US-listed rig operators are in a similarly precarious state right now. For MCE to see a recovery, these rig operators have to: 1) have the cash to splash on a fancy new buoyancy system, 2) have some confidence in their own operating outlook. The issue right now, as I see it, is that these guys are running at cash breakeven or even at a cash loss, with high debt levels, so getting banker sign-off to spend $Xm on MCE's LGS buoyancy is a very tough ask, even if they do save millions in annual operating costs as MCE claims. I expect MCE's 1H17 to show that it's still very much tough sledding for the entire industry at the moment, and the timing of the turnaround could lag even more than usual given that MCE's end customer base not only need to see a recovery in their operating outlooks, but they also need to fix their capital structures as they are, in general, over leveraged.

For me, MCE is an investment case where I feel like I know the "what" (ie an eventual recovery in demand for their buoyancy products), but the "when" is very hard to pinpoint - it could be anywhere from 6 months to 2 years away, so one has to be patient here and ride the volatility in the meantime.