Mermaid Maritime - CIMB Research 2016-12-05: Not on the bond-wagon

Mermaid Maritime - CIMB Research 2016-12-05: Not on the bond-wagon MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - Not on the bond-wagon

  • A stellar 2016 on cost-cutting efforts, coupled with a good run on contract wins.
  • In our view, its balance sheet is one of the healthiest in the offshore marine space with no bonds due and negligible debts.
  • Our pick to ride a volatile 2017F; maintain Add with an unchanged 0.5x CY17F P/BV-based target price of S$0.17 (1 s.d. below its 5-year mean).

A good run on contract wins and extensions for 2016

  • MMT announced US$66m worth of subsea contracts and secured long-term contract extensions for two of its associate-owned rigs (AOD I and AOD II) and a long-term offshore inspection repair and maintenance (IRM), solidifying work for at least the next year. 
  • As at end-Sep 16, the group had an order backlog of US$155.3m (excluding its AOD rigs).

Cost-cutting exercise bears fruit 

  • MMT embarked on aggressive cost optimisation in early 2016 and it has led to significant cost savings for the year. Key strategies were to cold stack nonperforming vessels and return chartered-in vessels when they were not in use.
  • Owned vessels that were cold-stacked were Mermaid Siam in 1Q16, Mermaid Challenger and SS Barakuda in 2Q16. Endeavour was returned in 1Q16.

Awaiting news on AOD III

  • AOD III is only contracted until Dec 16 but we are hopeful that there will be contract renewals given that offshore activities seem to be relatively stronger in the Middle East than in the rest of the world. 
  • The Asia Offshore Drilling (AOD) rigs have good track records with their clients, with average utilisation rate of 100% in 1H16 and 98% in FY15. We believe that this track record enhances AOD III’s chances of a contract renewal.

Best-in-class net gearing 

  • Net gearing narrowed to 0.02x at end-Sep 16 (vs. 2Q16: 0.05x) as cash balance exrestricted deposits of US$88m counterbalanced debts of US$95.6m. 
  • MMT stands as one of the few companies within the offshore marine space with negligible debt as at end-Sep 16.

Survivability is key; no notes outstanding

  • Similar to its offshore marine peers, earnings volatility cannot be discounted as the subsea sector is still soft. However, MMT will have no issues riding out the volatility given it has negligible debt and no outstanding notes. 
  • As at end-9MFY16, it also churned positive operating cashflow of US$39.2m.

More upside from here on

  • We like MMT for its stable balance sheet and see minimal downside risks to the stock given it is already trading at trough valuations of 0.39x CY17F P/BV vs. 5-year mean of 0.8x. 
  • 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 | 2016-12-05
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