Mermaid Maritime - DBS Research 2017-05-17: Not The Best Time To Buy

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MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - Not The Best Time To Buy

• 1Q17 core loss of US$0.5m in line on seasonal lows.
• Associate/JV income should stabilise at 1Q17 level of US$1.2m as day rate reductions take full effect.
• Seadrill facing huge debt restructuring programme; risks could spill over to Mermaid’s associate AOD.
• Orderbook down c.US$20m q-o-q to US$150m.

Downgrade to HOLD as Seadrill concerns persist. 

• While Mermaid continues to generate positive operating cash flows and is likely to remain in the black in FY17/18 despite the challenging operating environment, we advocate caution in the near term owing to the overhang caused by ongoing debt restructuring efforts at Seadrill, which is the majority partner at Mermaid’s key associate Asia Offshore Drilling (AOD). 
• If Seadrill is unable to successfully negotiate restructuring terms and is forced to liquidate, there may be significant impairment losses related to Mermaid’s investment in AOD – given the US$180m balloon repayment of AOD credit facility due in April 2018 – and the contracts for the three drilling rigs owned by AOD may also come under the scanner. 
• Under these circumstances, we ascribe a lower P/BV multiple to Mermaid’s investment in AOD and at our revised TP of S$0.20, we believe upside potential is not attractive enough.

1Q17 core losses of US$0.5m in line with usual seasonality; minimal changes to our earnings. 

• Mermaid’s 1Q17 core losses of about US$0.5m were in line with expectations, as 1Q is a seasonal low for subsea workload due to the monsoon period.
• Reported revenues for the quarter were also in line with our assumptions. We expect a return to profits of c.US$3-4m in 2Q17/3Q17 as vessel utilisation picks up from seasonal lows.
• Meanwhile, JV/associate income fell to US$1.2m this quarter as the full effect of the AOD rigs’ day rate reduction was felt, but should stabilise at this level going forward.

Valuation

• We maintain our P/BV peg at 0.7x for Mermaid’s core subsea IRM business but ascribe a lower peg of 0.25x for the investment in associate AOD (in line with Seadrill’s valuations).
• Accordingly, our TP is lowered to S$0.20.

Key Risks to Our View

• Failure to refinance the bank debt at associate AOD level in the next few months could lead to uncertainty.

WHAT’S NEW

1Q17 earnings highlights – seasonal low was expected 

Core earnings in line with our forecasts. 

• Mermaid’s 1Q17 results were broadly in line with expectations. Headline net profit of US$0.7m was slightly above our forecast of a US$0.5m loss for the quarter. However, stripping out a US$1.1m gain on reversal of withholding tax recognised during the quarter as well as a US$0.15m gain on disposal of subsidiary and PPE, core net loss of US$0.56m was in line.
• Revenue of US$36.5m was slightly above our expectations of US$34.6m, while continued cost control kept SG&A 19% lower y-o-y (after excluding a reversal of staff benefit accruals in 1Q16).

1Q a seasonal low for utilisation rates; management expects a pick-up in 2Q. 

• Overall fleet utilisation rate dropped to 36% in 1Q17, but 1Q is usually a seasonal low for Mermaid, due to the effects of the North-East Monsoon on subsea workload. 
• Mermaid’s four key vessels (Mermaid Commander, Mermaid Asiana, Mermaid Endurer, Mermaid Sapphire) had average utilisation of 48% - higher than the 38% seen in 1Q16. The seasonal upswing in 2Q17, as well as some short-term firm contracts beginning during the quarter, should drive workloads and revenues higher.

No annual dividend received from 34%-owned associate AOD. 

• While associate/JV income (almost all from AOD) should remain at 1Q17 levels (of ~US$1.2m per quarter) going forward, as the full effect of the lower day rates on renewed AOD rig contracts has been in play since December 2016, we note that Mermaid has not received its annual dividend (usually paid out in 1Q) from AOD. 
• The reason cited was that AOD needs to conserve cash now that the lower day rates are in full force; we suspect that partner Seadrill’s ongoing restructuring programme has also played a part.

Management does not expect dividends from associates to resume in the near term.

• Orderbook at a low of US$150m; Mermaid expects an uplift in 2Q17. Mermaid’s orderbook declined by c.US$20m q-o-q to US$150m, as revenue recognition more than offset the effects of some contracts won in Malaysia (a new market for Mermaid) during the quarter. 
• Management guided for a higher orderbook in 2Q17 on the back of current tendering activity.

Balance sheet remains healthy. 

• Mermaid remains in a net cash position, with only c.US$10.9m in bank loans maturing within the next one year. It also has no bonds outstanding.
• Management has said that it is open to asset purchases if the price is right – we think this could add value in the long run if it can secure good assets at distressed prices.

Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | http://www.dbsvickers.com/ 2017-05-17

DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 0.20 Down 0.250