Mermaid Maritime - CIMB Research 2016-06-09: A survivor

Mermaid Maritime - CIMB Research 2016-06-09: A survivor MERMAID MARITIME PUBLIC CO LTD DU4.SI 

Mermaid Maritime - A survivor

  • Key overhang for AOD jack-up rigs removed. We expect renewal at US$125k/day (-23%), driven by oil prices and production commitment from Saudi Arabia.
  • Recent subsea contract momentum has spurred hopes of improving utilisation.
  • Strongest balance sheet among the small caps, with net gearing at 0.1x.
  • We maintain our Add call with a target price of S$0.16, based on 0.5x FY16F P/BV.

Uncertainty in AOD removed, expect renewal at current day rate

  • Our fear of MMT’s (34% owned) jack-up rigs contracts being cancelled is addressed in the latest short extension of AOD I by two months from May to Jul 16, albeit at a lower day rate of US$125k/day. The contracts for AOD II and AOD III’s remain intact until Jul/Oct 16, respectively, but the rates were also adjusted to US$125/day. This could be the bottom of the rate cut in view of the positive movement in oil prices. 
  • We estimate these rigs will contribute US$11m p.a. to MMT’s net profit.

Recent subsea contract wins spur hope

  • MMT has announced US$46m of subsea contracts in Asia and Middle East in the past two weeks, bringing YTD subsea contract wins to c.US$66m. The contracts are mainly for survey, inspection, repair and maintenance in the Middle East and Asia. 
  • We believe the momentum of contract awards could sustain the utiltisation of subsea vessels to 57% in FY16 (FY15: 63%).

Leaner cost structure

  • We expect higher GP margin of 15% for FY16 (FY15:10%) with a leaner cost structure. Vessel running cost is expected to reduce as MMT cold stacked units that suffered poor utilisation in FY15 including Mermaid Siam, Endeavour and Nusantara. 
  • A blanket asset impairment (US$84m) in FY15 on vessels also lower depreciation expenses from FY16. EBIT losses will narrow to US$4m from US$16m in FY15 with rigorous SG&A cuts.

The strongest balance sheet among the small caps

  • 1Q16 net gearing was 0.1x (FY15: 0.1x) and should stay flat as we do not expect major capex in FY16. We have excluded the delivery of the three new builds (two tender rigs and one dive support vessel) in our forecasts given MMT’s decision to write off the 15% deposit of c. US$72m, signaling that it is prepared to walk away from the contracts. We expect it to generate FCF of US$30m in FY16, US$2m in FY17 and US$17m in FY18.

Potential privatisation candidate

  • As highlighted in our recent sector report, Beauty is in the eye of the beholder, MMT is a potential privatisation target given 
    1. trough valuation of 0.38x P/BV, 
    2. low net gearing of 0.1x, and 
    3. no incentive to stay listed in Singapore. 
  • Controlling shareholder TTA has sufficient debt headroom to privatise MMT with its 0.2x net gearing. We estimate S$55m (US$41m) is needed to buy the remaining 23% stake, assuming 40% takeover premium.

Maintain Add rating with target price of S$0.16

  • On a transfer of analyst coverage, we maintain Add with a lower TP of S$0.16, based on 0.5x FY16F P/BV (previously 0.4x), which is -1 s.d. below its 5-year mean. 
  • Our EPS is lowered by 87-89% for FY16-17 on lower revenue assumptions and contribution from the AOD rigs. 
  • Potential re-rating catalysts include stronger contract wins, and improved utilisation and rates. Downside risks include further rate cuts to AOD rigs’ renewals.

LIM Siew Khee CIMB Securities | Jack YING CIMB Securities | http://research.itradecimb.com/ 2016-06-09
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.16 Down 0.23