Mermaid Maritime - CIMB Research 2017-05-16: 1Q17 Low Associate Contributions And Wins

Mermaid Maritime - CIMB Research 2017-05-16: 1Q17: Low Associate Contributions And Wins MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - 1Q17: Low Associate Contributions And Wins

  • We deem 1Q17 core net profit of US$0.4m a miss vs. our/consensus estimates (US$16.7/US$12m); largely due to lower-than-expected associate contributions.
  • 2Q17 utilisation should improve, but contract wins have been guided to take longer than expected to emerge.
  • Negative overhang from Seadrill’s restructuring exercise could have been priced-in, in our view.
  • Downgrade to HOLD, as we believe investors will shy away until contract visibility improves. Balance sheet is still stable with net cash of US$8.1m as at 1Q17.

1Q17 tripped up by lower associate contributions 

  • 1Q is a seasonally weak quarter for MMT, hence the slight miss in revenue (-7.8% yoy; -17.2%) was expected. However, we were surprised by the lower Asia Offshore Drilling (AOD) associate contribution of US$1.2m (below 4Q16’s US$1.8m), suggesting that margins from the 3 AOD rigs post the contract extensions have narrowed further.

Operationally on better footing with cost rationalisation 

  • On a positive note, GP margins were up to 12.0% (vs. 1Q16: 4.0%) on cost rationalisation, despite lower 1Q17 utilisation of 36% (vs. 43% in 1Q16). 
  • MMT took the opportunity to cold stack non-performing vessels (Mermaid Siam/Mermaid Challenger/ SS Barakuda) in 1-2Q16 and guides that cost-cutting remains essential even today.

Contract wins taking longer than expected 

  • Management previously guided that they expected cable-lay and subsea contracts to emerge by 2H17, post the busy Feb-March bidding season. However, these seem to be taking longer than expected, hence new guidance are contract wins may be delayed towards end-17. 
  • Contract backlog narrowed at end-1Q17 to US$150m (vs. US$171m in 4Q16).

Lower FY17-19F EPS, but MMT remains a balance sheet story 

  • We cut our FY17-19F EPS by 43.9-45.1% largely on lower associate earnings from AOD; and delayed cable-lay contract wins to end-17/early-FY18F. These have minimal impact on MMT’s BV/share which have been depressed since 2015, due to extensive impairments (c.US$228.5m) booked on 
    1. assets and associate/JV stakes values; and 
    2. new asset deposits (cancelled in 2016). 
  • 1Q17 saw an US$8.1m net cash position (ex. restricted deposits) and operating cashflow of US$7.7m, even on lower utilisation.

Seadrill contagion risk potentially priced-in 

  • We believe the current share price implies that investments in associate of US$84.4m (as at end-16) could have been excluded from the MMT’s BV/share. Hence, negative impact in the event Seadrill (AOD’s 67%-stakeholder) fails its financial restructuring exercise (expected to emerge by end-July) may have been priced-in, in our view. 
  • AOD has a credit facility which is guaranteed by Seadrill, hence risks ‘going concern’ issues on a Seadrill fail. MMT believes that AOD’s financiers will refrain from calling on the debt given the rigs’ long-term contracts and high average utilisation of 99%.

Downgrade to HOLD, lower TP of S$0.19 

  • We lower our valuation basis to 0.56x FY17F P/BV (from 0.77x) at a 20% discount to 5-year historical mean of 0.7x; as though contagion risks from Seadrill are priced in, contract renewal risks are emerging. 
  • Risks to our view are swifter contract wins. 
  • MMT is a prime privatisation candidate. Major shareholder TTA has sufficient debt headroom (1Q17 net gearing of c.0.3x) and a buyout at the current share price would cost them a mere US$41m (for 22.7% stake).

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2017-05-16
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 0.19 Down 0.280