Mermaid Maritime - DBS Research 2017-08-17: Orderbook Renewal Will Be Watched

Mermaid Maritime - DBS Vickers 2017-08-17: Orderbook Renewal Will Be Watched MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - Orderbook Renewal Will Be Watched

  • Mermaid Maritime (MMT)'s 2Q17 core net profit of US$3.6m in line with estimates.
  • But orderbook down sharply q-o-q to US$98.6m; confidence in future earnings estimates eroded.
  • Operating cash flows turned negative in 2Q17, though balance sheet still in net cash position.



Low orderbook a concern but strong balance sheet remains a saving grace. 

  • Mermaid’s orderbook declined by c.34% q-o-q to US$98.6m as of 2Q17, setting a new low. While continued deferment of Inspection, Repair and Maintenance (IRM) work by oil majors is one reason, we cannot discount the effects of stronger competition from increased tonnage in the region. 
  • One of the key Indonesian-flagged chartered-in vessels Nusantara was returned to its owner in light of weak market conditions.
  • Meanwhile, the Seadrill restructuring process remains an overhang on the stock, as key associate Asia Offshore Drilling (Seadrill holds a c.66.2% stake) could potentially see impairments and/or change of majority shareholder if the restructuring plan fails to garner approval, putting rig contracts under scrutiny. 
  • We lower our earnings by 3%/8% in FY17/FY18 to account for the weaker orderbook, but maintain HOLD as we do not expect the kind of liquidity risk-related selloff and distressed valuations seen in other Singapore O&M stocks of late, as Mermaid has a relatively strong balance sheet, with a net cash position.


Where we differ: 

  • We note that Mermaid has impaired an above-average proportion of book value of its vessel fleet (c.30%), thus P/BV ratios are in reality lower than implied (vs. those peers which have not impaired assets as much).


Potential catalyst: 

  • Failure to replenish the orderbook, especially in 4Q17 (when tenders are usually converted to firm contracts) could result in further erosion in visibility and downward share price pressure.


Valuation

  • We lower our P/BV peg to 0.6x for Mermaid’s core subsea IRM business (excluding stacked vessels) – slightly higher than where PACC Offshore is trading currently (both have made similar proportions of impairments; Mermaid has a stronger balance sheet) – but now ascribe zero value to associate AOD (see next page). 
  • Our TP is hence, lowered to S$0.14.


Key Risks to Our View

  • A better-than-expected outcome for associate AOD’s debt refinancing could lead to revaluation.


WHAT’S NEW


Orderbook outlook turns more negative; chartered-in vessel Nusantara returned on weak market conditions. Core profits in line with our estimates; revenues up q-o-q on seasonality. 

  • Mermaid’s 2Q17 core net profit of c.US$3.6m was in line with our estimates. 
  • Costs were kept under control while revenue showed a c.22% rebound q-o-q to US$44.5m, up from a seasonally weak 1Q, on the back of higher overall utilisation of 42% (vs. 36% in 1Q17, depressed by monsoon season). 
  • Mermaid’s four key vessels, which account for a substantial portion of revenues, recorded utilisation of 73% for the quarter – higher than 2Q16’s 66%.

Orderbook down c.34% q-o-q to US$98.6m. 

  • Mermaid’s contract orderbook declined significantly this quarter despite 2Q being a seasonally stronger quarter. Of the current orderbook, c.70% is expected to be recognised in 2H17, implying flat-to-lower h-o-h top line. 
  • Mermaid had guided for an improvement in the orderbook last quarter, but that has not materialised. Management highlighted that while competition has intensified, the primary reason that tenders have not been converted to contracts is that oil companies continue to defer IRM work as long as possible. They now expect the orderbook to sustain around current levels over the next 6-12 months, which does not bode well for visibility.
  • As a consequence, Mermaid has recently returned the Nusantara, which is one (out of two) of its chartered-in vessels, back to its owner.

OCF turns negative, but net cash position provides some comfort. 

  • Mermaid’s OCF turned negative this quarter at -US$1.8m; trade accounts receivable notably showed a c.US$12.2m q-o-q jump, which is again an emerging concern. 
  • On the positive side, Mermaid remains in a net cash position, so OCF outflows are not a huge worry for now, but we would keep our eyes on these numbers.

Seadrill restructuring could end up in bankruptcy, resulting in impairments at Mermaid’s associate AOD. 

  • As highlighted earlier, Mermaid’s majority partner in Asia Offshore Drilling (AOD), Seadrill, is working on a restructuring exercise with various stakeholders and the negotiation period has now been extended to 12 September 2017. The company has reiterated that the restructuring plan will likely involve Chapter 11 proceedings. 
  • Given that AOD’s credit facility is guaranteed by Seadrill and cross default clauses exist between this facility and Seadrill's other credit facilities, AOD’s credit facility – which matures in April 2018 with a balloon payment of US$180m – is likely to face technical default and necessitate an outright sale of assets or in the best-case scenario, a new majority partner for Mermaid. 
  • Asset impairments should be expected, and to be conservative, we now ascribe zero valuation to Mermaid’s stake in AOD.




Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | http://www.dbsvickers.com/ 2017-08-17
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.14 Down 0.200



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