Mermaid Maritime - CIMB Research 2017-01-02: Securing AOD III extension; one key risk down

Mermaid Maritime - CIMB Research 2017-01-02: Securing AOD III extension; one key risk down MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - Securing AOD III extension; one key risk down

  • Positive on AOD III rig’s 3-year contract extension worth c.US$112m. Estimated daily charter rate (DCR) is US$102.3k/day, above forecasted rate of US$82.9k/day.
  • Revise CY17-18F net profit up by 28.2-32.6% on higher AOD III earnings and further cost savings by MMT. Cash preservation and cost savings remain key.
  • Maintain Add call with a higher target price of S$0.24 (from S$0.17) on 0.65x (from 0.5x) CY17F P/BV.
  • Narrower discount of c.16% (prev. 35%) on historical 5-year average mean of 0.77x. 
  • A low-risk stock to ride sector recovery given the healthy balance sheet, in our view.

Settling the last of the AOD rigs 

  • Last week, MMT announced that it had secured a three-year contract extension for its third associate-owned AOD rig. 
  • We are very positive on the news given the dearth of jack-up rig contracts of late. The contract extension safeguards work till 2019 and implies that all MMT’s associated-owned rigs have secured pipelines till 2019.

Secured DCR above average for Persian Gulf of US$95.5k/day 

  • The DCR of US$102.3k/day is 23% higher than our forecasted rate of US$82.9k but below previous DCR of US$114k/day (according to Riglogix) and DCR of US$102.9k its sister rigs; AOD I and AOD II; won for their respective 3-year extensions in July 16.
  • Nonetheless, it is still above the average DCRs seen for high-spec 300+ft independent cantilever (IC) rigs in the Persian Gulf of US$95.5k/day.

Cash preservation and cost savings are key 

  • In Dec 16, MMT announced the cancellation of three assets (Mermaid Ausana – a subsea vessel and MTR-3 and MTR-4 - two tender rigs). 
  • In our view, the cancellation of these assets illustrated MMT’s forefront aim of cash preservation as taking delivery would have cost MMT a cumulative cash outlay of c.US$378.8m. 
  • We also understand that MMT has pressed on with more cost rationalisation exercises to mitigate the potential volatility in utilisation.

Revising CY17F-18F forecasts up by 28.2-32.6% 

  • We lift our AOD III contribution to US$2.9m p.a. in CY17-18 (from US$1.9m p.a. previously) largely to account for the higher DCR in CY17-18. 
  • We have also lowered our SG&A forecasts to 11.5% of revenue (from 12.5%) as believe MMT cost rationalisation efforts will continue moving into CY17. Consequently, our CY17F and CY18F net profit forecasts are lifted to US$17.9m and US$21.0m (from US$13.5m and US$16.4m, respectively).

Premium accorded for healthy balance sheet 

  • We raise our CY17F P/BV-based valuation to 0.65x (from 0.5x) as we believe: 
    1. the risk of its associate earnings has been mitigated, and 
    2. the stock should be accorded a narrower discount (estimated c.16%) to its average historical 5-year mean of 0.77x given its lower-than-peer riskiness. 
  • The discount is still justified as subsea order win volatilities could still be present in CY17. As a comparison, when crude oil prices traded at US$60- 65/bbl, MMT’s share price traded at 0.6-0.65x forward P/BV (refer to Figure 4).

Maintain Add, with higher target price of S$0.24 

  • Overall, we believe MMT is a good stock to ride the sector recovery. In our view, its healthy balance sheet underpins its survivability and the freedom to capitalise on any opportunistic M&As that could emerge in CY2017. 
  • Risks are 
    1. lower-than-expected order wins, and 
    2. lower-than-expected cost savings, leading to lower margins.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2017-01-02
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 0.24 Up 0.170