Mermaid Maritime - DBS Research 2016-11-16: Orderbook decline a worry

Mermaid Maritime - DBS Vickers 2016-11-16: Orderbook decline a worry MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - Orderbook decline a worry

  • 3Q16 earnings above expectations on cost savings.
  • But orderbook down to US$155m as of end-3Q16.
  • Associate profits will fall as expected on reduced rates for the AOD rigs.


Maintain HOLD for now. 

  • Despite the lower earnings visibility on the back of a declining orderbook, and the expected fall in JV/associate profits, we maintain our HOLD call as we believe investors willing to ride out this oil price cycle can still consider relatively safer stocks like Mermaid, especially in the wake of more O&G-related companies facing distress (e.g. Swissco announcing it will file for judicial management this week).
  • Mermaid continues to generate positive cash flows and has low net gearing of 0.11x currently with no bonds outstanding, thus providing comfort. 
  • Additionally, we believe Mermaid remains a candidate for privatisation by majority shareholder Thoresen Thai and its promoter group, which together control 77% of the outstanding shares. 
  • The key risk for Mermaid remains the ability to arrange for financing and find contracts for the three newbuild vessels on order. These are scheduled for delivery at end-2016 and mid-2017, subject to negotiations with the yards.


3Q16 profits were above expectations on cost savings, but the low orderbook calls for caution. 

  • Mermaid’s core net profit of US$7.5m was slightly above our estimates due to better-than-expected cost savings realised. However, the orderbook has decreased to a low of US$155m from US$246m as of end- 2Q16, and thus revenue visibility has deteriorated markedly.


Tweaking our earnings estimates. 

  • Adjusting for this stronger-than-expected quarter, we raise FY16 earnings, but factoring in lower rates negotiated on some existing charters, we now expect minor losses in FY17, versus breakeven levels previously.


Valuation

  • Our TP is adjusted upwards to S$0.12, based on a slightly higher 0.35x P/BV peg, rolling over the valuation base to FY17 and factoring in a stronger USD.


Key Risks to Our View

  • Only a sharp spike in oil price – albeit unlikely in our view – could result in some respite from the gloom surrounding the offshore services industry currently.




Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-11-16
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.12 Up 0.090




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