Mermaid Maritime - CIMB Research 2017-03-01: 4Q16 Starting FY17 with a stronger balance sheet

Mermaid Maritime - CIMB Research 2017-03-01: 4Q16 Starting FY17 with a stronger balance sheet MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - 4Q16 Starting FY17 with a stronger balance sheet

  • FY16 core net profit (US$18.3m) formed 91% of our forecast due to slightly weaker revenue and GP margins. It met consensus estimate.
  • Despite the slight miss, it is undeniable that Mermaid Maritime (MMT) has posted a significant earnings turnaround on the back of stringent cost rationalisations.
  • Financially flexible from healthy balance sheet and no impending vessel deliveries.
  • Maintain Add with a higher target price of S$0.28, based on FY17 P/BV of 0.77x (10% above its historical 5-year average).



4Q16 skewed by lower revenue and weaker GP margins 

  • Mermaid Maritime (MMT)’s 4Q16 core net profit of US$2.7m was below our US$3.8m forecast largely due to revenue and EBIT margins, which came in at US$44.2m and 5.6% respectively (vs. our forecasted US$48.9m and 11.0%). 
  • 4Q16 core net profit excluded a US$4m provision booked in SG&A for cancelled vessels which we consider as one-off, and a tax credit of US$2.1m. 
  • Overall, 4Q16 was a large improvement over 4Q15’s core loss of US$16.2m.


An applaudable FY16 due to cost rationalisations 

  • MMT posted a significant turnaround in FY16 with a full-year core net profit of US$18.3m (vs. FY15 core net profit of US$3.7m). Revenue fell 45% to US$185.2m (vs. FY15: US$336.6m) on the back of day rate cuts and lack of cable-lay contracts, while associate earnings also fell 43.3% due to rate cuts from its Saudi Aramco contracts. But these were all mitigated by MMT’s tireless efforts to optimise its costs, via cold stacking exercises, reduction in marine crew & dive tech expenses and SG&A.


Low likelihood of further impairments 

  • Unlike its peers, MMT did not report any impairments in 4Q16, as it had already taken impairments of US$163m for own assets and US$70.7m for AOD rigs post an extensive exercise in 2015. 
  • Moving ahead, we believe there is low possibility of further impairments unless the sector takes a turn for the worse again.


Outlook 

  • Management guided that there is still some time-lag in subsea opportunities and that it is still focused on cash preservation and cost management. MMT enters FY17 with an order book of US$170.6m and long-term contracts for its AOD rigs (3-year contracts till Jun/Dec-19). 
  • We note that its four major vessels recorded an average utilisation of 72% in 4Q16 (vs. 4Q15’s 48%). Management guides Mermaid Commander could see lower utilisation in 1H17 and hopes to improve that via the bidding season in Feb-Mar 17.


Healthy balance sheet = financial flexibility 

  • MMT turned net cash as at end-16, and has resolved its loan covenant breach (which saw long-term (LT) loans being reclassified as short-term (ST) in 2016). It also finalised the cancellation of the newbuilds it had committed to pre-2016. In terms of debt repayments, the majority of its US$89.5m LT loans will mature after four years or more.
  • It reported a positive operational cashflow of US$49.0m in FY16.


Maintain Add 

  • We trim our FY17/18F EPS by 6.7/5.9% on lower revenue assumptions (-7.7%/-6.8%).
  • We also introduce FY19 forecasts. We maintain Add but with a higher TP of S$0.28 (vs S$0.24) on a FY17F P/BV of 0.77x (0.65x prev.). 
  • We believe MMT warrants c.10% premium to its historical 5-year mean of 0.7x, given its balance sheet strength, minimal downside risk (low impairment and blow-up risks), and its position to capitalise on any asset acquisition opportunities ahead. 
  • Key risk is weaker utilisation and DCRs.




Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-03-01
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.280 Up 0.240





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