Mermaid Maritime - CIMB Research 2017-11-15: 3Q17 Miss On Higher Costs; Await Seadrill Plans

Mermaid Maritime - CIMB Research 2017-11-15: 3Q17 Miss On Higher Costs; Await Seadrill Plans MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - 3Q17 Miss On Higher Costs; Await Seadrill Plans

  • Mermaid Maritime's 3Q17 core net loss of US$2.4m was a surprise and below expectations largely on higher-than-expected costs. Projects were delayed to 4Q17F from 3Q17.
  • 9M17 core net profit accounted for only 14% of our and 16.8% of Bloomberg consensus FY17F.
  • AOD issue should close by end-17F, as it has a balloon payment due by Apr 18.
  • Maintain Reduce with unchanged TP of S$0.14, based on 0.4x CY17F P/BV. We await Seadrill update for better clarity.

3Q17 vessel utilisation dives on project delays; better 4Q17 guided 

  • Mermaid Maritime's 3Q17 revenue fell 32.1% qoq and 41.8% yoy to US$30.2m (vs. 2Q17: US$44.5m, 3Q16: US$51.9m) on the back of fewer project executions due to delays in Southeast Asia (SEA) projects and political uncertainties in the Middle East. 
  • Average utilisation of MMT’s four major vessels (Commander/Asiana/Endurer/Sapphire) fell to 42% (from 2Q17/3Q16 average utilisation of 73%/83%). With sticky SG&A costs, it reported a loss in 3Q17.
  • Management said some projects have kick-started in 4Q17, and expects a better 4Q17.

Order book rose; but FY18F contract visibility likely back-ended 

  • The extension of a Saudi Aramco subsea contract in Sep 17 pushed 3Q17 order book to US$174m (vs. US$99m in 2Q17). During their 3Q17 results, large global subsea companies like Subsea7 and TechnipFMC mentioned a gradual recovery in tendering activity and guided for awards from 1H18F. 
  • However, Mermaid Maritime said that its portion of the awards typically lags major companies. As such, we believe that contracts for Mermaid Maritime will likely emerge only in the latter part of CY18F.

Seadrill update 

  • Management guided that a decision on Asia Offshore Drilling (AOD) will likely have to be taken by year-end, as its Senior Secured Credit Facility (SSCF) with an outstanding balance of US$209m at Sep 17 matures in Apr 18 with a balloon payment of US$180m.
  • Investments in associates were c.US$87.8m as at end-3Q17, c.25% of Mermaid Maritime’s equity. 
  • Options for AOD are to participate in Seadrill’s restructuring package deal or source its own restructuring deal. The three drilling rigs in AOD recorded 100% utilisation in 3Q17.

Maintain Reduce; await Seadrill decision for better clarity 

  • We cut our FY17F EPS by 38.1% to reflect the higher costs, but maintain our FY18-19F EPS as we have already accounted for a dip in revenue. We await the Seadrill decision for better clarity on the stock. 
  • We maintain our Reduce call. Our TP remains unchanged at S$0.14 based on 0.4x CY17F P/BV (-1 s.d. from average mean). 
  • Upside risks are more contracts and a favourable Seadrill deal. 
  • Downside risks include lower-than-expected contract wins.

Potential privatisation or M&A candidate 

  • Mermaid Maritime (MMT) is a potential privatisation or M&A candidate, in our view. Major shareholder TTA has sufficient debt headroom (3Q17 net gearing at c.0.13x) and a buyout at the current share price would cost it a mere US$47m (for 22.7% stake). 
  • From an M&A perspective, there could be opportunity to tie up with other offshore companies to form a larger entity to achieve scale to participate in tender/award recovery.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2017-11-15
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.140 Same 0.140