Mermaid Maritime - CIMB Research 2017-08-17: 2Q17 Lower Order Book; Seadrill Overhang Persists

Mermaid Maritime - CIMB Research 2017-08-17: 2Q17: Lower Order Book; Seadrill Overhang Persists MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - 2Q17: Lower Order Book; Seadrill Overhang Persists

  • Mermaid Maritime's 1H17 net profit of US$3.7m was a miss at 40%/42% or our/consensus full-year estimates, largely on account of higher-than-expected SG&A expenses.
  • We are more alarmed by the drop in order book to US$99m as at end-2Q17. Management said major wins were elusive as projects continued to be delayed.
  • Stable balance sheet is a slight positive but investors may shy away until there is more visibility on contract wins and the Seadrill restructuring exercise, in our view.
  • Reduce FY17-19F EPS by 19.9-41.1%. Downgrade to Reduce and cut target price. Welcomed upside risks are swifter contract wins.

2Q17 improvement capped by plateau in SG&A savings 

  • Mermaid Maritime's 2Q17 net profit of US$3.4m (-53.8% yoy, more than double qoq) was a miss as SG&A stayed at 14.1% of revenue (vs. our expected 11.3%). 
  • Revenue of US$44.5m was lower by 10.4% yoy on account of the lack of cable lay contracts and lower blended vessel utilisation of 42% (vs. 2Q16’s 45%) as lower chartered-in vessel utilisation diluted the higher average utilisation of 73% for the 4 major vessels (Mermaid Commander, Mermaid Asiana, Mermaid Endurer, Mermaid Sapphire) registered in 2Q17.

Order book narrows alarmingly 

  • We were alarmed by the significant reduction in order book to US$99m as at end-2Q17 (end-1Q17: US$150m). In previous quarters, management believed that orders would return in 2H but, during the 2Q17 analyst briefing, it said that awards were repeatedly delayed and subsea work won was also of little help as they were at relatively low rates and short durations. 
  • Forward guidance that the order book could remain at such low levels for the next 6-12 months was unsettling.

Seadrill contagion risk remains a dampener 

  • Management intends to keep AOD out of any schemes of arrangements or proceedings but this depends on the outcome of re-financing negotiations at the Seadrill level, which have been extended till 12 Sep 17. 
  • Investments in associates were c.US$86.7m as at end-2Q17, c.25% of MMT’s equity, but we believe focus is on the potential negative spillover effect on MMT’s profitability as AOD accounts for a large portion of MMT’s bottomline. 
  • The three drilling rigs in AOD ran on 100% utilisation for 2Q17.

Lower FY17-19F EPS 

  • We cut our FY17-19F EPS by 19.9-41.1% as we reduce our revenue estimates to feature no cable lay contracts and lower utilisation of MMT’s owned vessels on the back of the recent weak order book. We also raise our FY17-19F SG&A estimates to 13.0-14.0% of revenue (from 12.5% per annum previously) to account for the plateau in cost savings.
  • Management highlighted it returned one of its chartered-in vessels and was reviewing options to cold-stack an older owned vessel. This could stem margin erosion, in our view.

Downgrade to Reduce from Hold; TP lowered to S$0.14 

  • It pains us to downgrade our call to Reduce as we had deemed MMT one of the safer small-cap bets given its stable balance sheet (slim net cash position at end-2Q17, assets already significantly impaired in FY15) and the absence of bond issues its offshore peers face. However, emerging order book risks prove too great to ignore and will heighten pressure on share price. 
  • We lower our valuation to 0.4x FY17F P/BV from 0.56x (-1 s.d. from average mean), reducing our target price to S$0.14 from S$0.19 previously.

Privatisation candidate 

  • MMT remains a prime privatisation candidate in our view. Major shareholder TTA has sufficient debt headroom (2Q17 net gearing of c.0.2x) and a buyout at the current Mermaid Maritime share price will cost it a mere S$46.8m (for 22.7% stake).

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2017-08-17
CIMB Research SGX Stock Analyst Report REDUCE Downgrade HOLD 0.140 Down 0.190