Mermaid Maritime - DBS Research 2016-05-16: Earnings under pressure

MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - Earnings under pressure

1Q16 net profit of US$1.3m was in line
Revenues sink on low subsea vessel utilisation
Income from drilling rig associate AOD likely to fall in 2016/17 as contracts are renegotiated.

Mermaid reported net profit of US$1.3m, an improvement over 4Q15’s core net loss of ~US$11m, and largely in line with our estimate of US$1.4m.
Revenues fell sharply to US$39.6m (down 44% q-o-q) on lower subsea vessel utilisation – which was expected as some of Mermaid’s subsea vessels completed their contracts in late 2015/early 2016.
The seasonal downcycle in South-East Asia – owing to the prevailing monsoon season from November to March – likely exacerbated the impact.

Core operating income from subsea and tender rig assets remained in the red in 1Q16, but the US$3.1m operating loss was markedly lower q-o-q.
Notably, Mermaid’s administrative expense for the quarter fell from the historical US$11-15m level to just US$7.4m (after stripping out a one-off item: reversal of accrued bonuses of ~US$3m). It remains to be seen if this is sustainable.

Profit from associate Asia Offshore Drilling (AOD) decreased from >US$7m in previous quarters to US$4.3m in 1Q16, as a result of the day rate reduction from US$180k/day to US$163k/day on its three jackup rigs.
Last we heard, associate partner Seadrill is negotiating with Saudi Aramco, the charterer, for an extension of contracts. Given Saudi Arabia’s steadfast push to maintain production levels, and considering the fact that Saudi Aramco had previously incurred some modification capex on these rigs, we think a renewal is likely, although there will be downside risk to day rates.

As of end-1Q16, net gearing stands at just 0.1x – much lower than many of the listed offshore names in the region. The lack of pressing loan repayments is therefore positive from a cash flow perspective.
Nonetheless, in 4Q15 Mermaid reclassified about US$90m of its bank debt to current liabilities, citing a technical breach of covenant, but ensuring investors that the issue would be resolved. That debt remains in current liabilities in 1Q16. We need to obtain more details from management, but in the unlikely worst-case scenario of a principal repayment triggered this year, Mermaid may face some cash-flow issues.

Mermaid’s business has slowed considerably from peak levels in 2014. Its two old tender rigs are cold stacked, while the two newbuilds have yet to secure contracts.
Incremental profits from chartered-in vessels have shrunk significantly as the company has faced difficulty in placing those vessels for work in the market.
Downside risks also exist in the form of non-renewal of AOD charters and lack of contracts for the newbuild assets.
Given that Mermaid’s earnings in subsequent quarters will likely come under pressure as income from AOD declines further, we maintain our FULLY VALUED call with an unchanged TP of S$0.09 based on a P/BV peg of 0.3x.

Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-05-16

FULLY VALUED Maintain FULLY VALUED 0.09 Same 0.09