Mermaid Maritime - CIMB Research 2016-10-21: Not on the 'bond' wagon

MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - Not on the “bond” wagon

We are positive on the contract extensions for AOD and subsea IRM worth an estimated c.US$148.8m (MMT’s stake), despite 14-18% estimated charter rate cuts.
Balance sheet concerns are negligible, in our view. Net gearing stood at 0.1x at end- 1H16, below the 1.0x average of its OSV peers.
We believe MMT is on the road to recovery, having generated positive operating cash flow of US$25m at end-1H16, despite low vessel utilisation.

Maintain Add and target price of S$0.16, based on 0.5x FY16F P/BV. MMT is trading at trough valuations of 0.3x FY16F P/BV, below its 5-year mean of 0.8x.

We are relieved that MMT was able to secure the contract extensions for the AOD I and II jack-up (JU) rigs and its long-term subsea inspection, repair and marine (IRM) contract, given the dearth of JU rig and subsea contracts in today’s market.
At the very least, these contracts provide recurring baseline income for 2017-18.
For FY17-18F, we forecast that AOD I and AOD II will contribute associate earnings of US$5.9m p.a. and the IRM contract will contribute US$54m revenue p.a..

AOD III’s extension is only until Dec-16. We remain optimistic on a contract renewal, given that the jackup rig utilisation in the Middle-East (Persian Gulf) still seems higher than the average worldwide utilisation.
We also believe the rig has a good track record with its clients given historical average utilisation rates for the three AOD rigs were 98- 100% in FY15 to 1H16.
We conservatively forecast FY17-18F associate contributions of US$1.9m p.a. on lower daily charter rate (DCR) of US$82.9k (vs. US$103.7k presently).

We forecast MMT's net gearing (1H16: 0.1x) will stay low throughout FY16-18F, as the company is highly likely to defer its newbuild deliveries until the market recovers or when it is backed by contracts, in our view. As it did not issue any bonds, it is not cashstrapped and does not have to serve any coupon payments or face redemption exercises.
MMT reported positive operating cash flow of US$25.1m at end-1H16.

We expect the market to pay more attention to companies that are likely to survive the current industry rout, like MMT, when positioning for any sector upswing.
Crude oil price trends are back in positive territory following OPEC and Russia’s commitment to manage crude oil production.

MMT trades at trough valuation of 0.3x FY16F P/BV (5-year mean: 0.8x), which we think is unwarranted given we see minimal forward downside risks. Our TP of S$0.16 implies 0.5x FY16F P/BV.
We raise our FY16-18F EPS by 10-253% to factor in better margins post-MMT and AOD cost-rationalising exercises.
Potential re-rating catalysts are better DCRs for AOD III and heightened utilisation for its subsea vessels.
A key risk is the non-renewal of AOD III’s contract.

We do not rule out privatisation, as major shareholder TTA has sufficient debt headroom (net gearing of 0.3x at end-1H16) to take the MMT private, in our view.
A buyout at the current share price would cost TTA a mere US$23m (for 22.7% stake).

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2016-10-21

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