Mermaid Maritime - CIMB Research 2016-11-15: "Maid"-it on better utilisation and cost savings

Mermaid Maritime - CIMB Research 2016-11-15: Maid-it on better utilisation and cost savings MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime -

  • 3Q16 core net profit of US$7.5m was above our and consensus expectations on stronger-than-expected revenue and EBIT margins.
  • 9MFY16 core net profit of US$16.2m surpassed our and streets’ FY16 estimates of US$10.6m and US$11.8m, respectively.
  • Upgrade FY16-18F EPS by 79.7-89.1% on better EBIT margins across the years.
  • Maintain Add with higher TP of S$0.17, now based on unchanged 0.5x FY17F P/BV (FY16F P/BV previously). We continue to favour MMT for its strong balance sheet.

Higher utilisation for Diving Support Vessels (DSV) 

  • 3QFY16 revenue rose to US$51.9m qoq (+4.5%) on higher utilisation of MMT’s subsea fleet (3QFY16: 56% vs. 2QFY16: 45%). 
  • The Nusantara chartered-in vessel started work in 3QFY16; while the Endurer and Commander continued to work at high utilisation in the quarter. This mitigated the fall in cable-lay revenue in 3QFY16 (-79.1% qoq, -93.6% yoy).

Cost-cutting efforts continue to bear fruit 

  • 3QFY16 EBIT margins were stellar at 12.1% due to: 
    1. higher GP margins of 24.4% upon lower manning and idling costs (Siam, Challenger and Barakuda were cold-stacked); and 
    2. lower SG&A costs of US$6.5m versus US$6.9m in 2Q16 (-5.9% qoq) as MMT’s cost rationalisation efforts paid off. 
  • We had previously forecasted EBIT margin would narrow due to lack of cable-lay work.

Balance sheet strengthens further 

  • Net gearing narrowed to 0.02x (vs. 2Q16: 0.05x) as cash balance ex-restricted deposits strengthened to US$88m at end Sep-16 (versus US$79.3m as at end June-16). 9MFY16 operating cash flow was positive at US$39.2m.

Order book of US$155.3m at end-Sep; awaiting AOD III extension

  • Order book (excluding AOD) as at end-Sep narrowed from US$247m at end-Jun, on contract execution and lower charter rates for a Middle East contract. 
  • We understand c.30% of the order book will be recognised in 4QFY16, implying that c.US$109m worth off works will be carried forward to FY17, in our view. AOD III (an associate) will see contract expiry by Dec 16 and MMT is working hard to secure extensions for it.

FY16-18F net profit upgraded by 79.7-89.1% 

  • We have opted to be conservative on FY17-18 revenue forecasts as we understand three vessels (Commander, Endurer and Sapphire) will face contract expiries on their firm tenure by year-end. However, we raise EBIT margin forecasts to account for MMT’s successful cost rationalisation efforts both on operating and SG&A. 
  • Management guides active bidding in early next year to spur order book for FY17 onwards.

Maintain Add call with higher TP of S$0.17 

  • Maintain Add. Earnings volatility cannot be discounted given the subsea sector is still soft, but we see minimal downside risks to the stock given it 
    1. is trading at trough valuations of 0.36x FY16F P/BV (5-year mean: 0.8x), 
    2. boasts a stable balance sheet; and 
    3. is churning positive operating cash flow even at these levels of utilisation. 
  • Key downside risks are non-renewal of AOD III’s contract which could erode associate contributions, and lower-than-expected utilisation of its subsea vessels in FY17-18.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2016-11-15
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.17 Up 0.160