Mermaid Maritime - Safety in balance sheet strength
- FY16 earnings slightly above on cost savings
- Balance sheet risks almost completely removed; operating cash flows remain positive in 4Q16
- Looks well positioned to ride out the cycle better than most peers
Maintain BUY as Mermaid looks set to remain profitable through the crisis.
- Balance sheet risks have mostly dissipated for Mermaid Maritime (Mermaid) following the cancellation late last year of newbuild contracts for three vessels (two tender rigs and one dive support vessel), which would have otherwise entailed US$379m in remaining capex commitments.
- Balance sheet has moved to net cash position as at end-FY16 as Mermaid generated US$49m positive operating cash flow in FY16.
- With a healthy operating profit improvement from subsea business in FY16 on the back of cost reductions and renewals of contracts for all three jack-up rigs under associate AOD III coming through in FY16, earnings visibility has improved and the stock continues to offer a more favourable risk-reward profile amid industry peers.
- Chances of privatisation by parent Thoresen Thai and its associated promoter group provides further upside potential.
FY16 profits were slightly above expectations on cost savings.
- Mermaid’s core net profit of US$17.1m was slightly above our estimates due to better than expected cost savings and higher than expected associate income in 4Q16. Taking this into account, we revised up our net profit forecasts for FY17F/18F to US$7.9m/ US$9.6m from US$1.7m/ US$4.4m earlier.
- The drop in profit in FY17F compared to FY16 is due to the drop in associate contributions owing to revision of day rates for the rig contract renewals but sustained profitability puts Mermaid in an enviable position compared to peers in the oil services space.
- Given the healthy balance sheet situation, we maintain our P/BV peg at 0.7x – slightly below our peg for PACC Offshore, our top pick amongst SGX-listed OSV operators - and adjust our TP to S$0.25, representing a c.25% upside at current prices.
- Our 2-stage DCF (9.2% WACC; terminal growth 1%) valuation, used as a cross-check measure, also supports this.
Key Risks to Our View
- Failure to refinance the bank debt at associate AOD level in the next few months could lead to some uncertainty.