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
- assets and associate/JV stakes values; and
- 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
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LIM Siew Khee
CIMB Research
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http://research.itradecimb.com/
2017-05-16
CIMB Research
SGX Stock
Analyst Report
0.19
Down
0.280
