Mermaid Maritime - CIMB Research 2018-01-12: Awaiting Seadrill Plans But Downside Largely Capped

Mermaid Maritime - CIMB Research 2018-01-12: Awaiting Seadrill Plans But Downside Largely Capped MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - Awaiting Seadrill Plans But Downside Largely Capped

  • Current FY18F P/BV of 0.4x implies the market has priced in the potential write-off in the investment in Asian Offshore Drilling (AOD). Downside risks are capped for now.
  • Mermaid Maritime (MMT) guided for closure of the Seadrill issue in Jan 18. But we note that a disclosure hearing expected to be conducted on 10 Jan by Seadrill was delayed to 1 Feb.
  • FY18F/19F EPS cut by 26.5/20.8% as FY18-18F are looking like tough years. Nevertheless, the cuts have minimal impact on the already-depressed BV/share post extensive asset strategic review performed in 2015.
  • We roll forward our valuations and raise our TP to S$0.142 (from S$0.135) based on an unchanged 0.43x CY18 P/BV (-1.s.d level). Upgrade call to NEUTRAL (from REDUCE).

Current valuation excludes investments in associates/JVs 

  • Mermaid Maritime’s (MMT) current FY18F P/BV valuation of 0.4x may have at least priced in the write-off of its investment in associates and joint ventures of US$90.0m at end Sep-17, which is largely related to the turnout of Seadrill’s (MMT’s majority partner in Asian Offshore Drilling) restructuring exercise, in our view. However, near-term upsides are capped until clarity on the Seadrill financing is completed.

Seadrill financing closure by 1Q18? 

  • Seadrill embarked on a restructuring exercise in Sep 17; which has spillover “cross-default” risks on a US$209m Senior Secured Credit Facility (SSCF) in Asian Offshore Drilling (AOD) that matures in Apr 18. At end-Sep 17, Mermaid Maritime’s investments in associates were c.US$87.8m (c.25% of equity) which we deem remains a risk. 
  • AOD’s decision to join in Seadrill’s restructuring or source its own deal was last guided to be within Jan 18. But the recent delay in Seadrill’s disclosure hearing to Feb 18 (from Jan originally) implies a potential shift in the timeline.

A tough 2018-2019 

  • As at end-Sep 17, order book stood at US$174m (vs. US$99m in 2Q17) sufficient for only 15 months of revenue, in our view. Three vessels are also due for dry-docking exercises in early FY18F (i.e. potential losses for 1Q18F). 
  • Mermaid Maritime (MMT) guided that its portion of the subsea awards typically lag the major companies (i.e. Subsea7 and TechnipFMC) which have guided for a gradual recovery in tendering activity and awards from 1H18F onwards. Cable-lay contracts are still elusive.

Cutting forecasts; but that has minimal impact on BV/share 

  • Given the weakness, we cut our FY18-19F EPS 20.8-26.5% on lower revenue and higher costs (Mermaid Maritime may have reached a ceiling in cost cutting exercises). 
  • P&L revisions have minimal impact on Mermaid Maritime’s BV/share which has remained depressed since 2015, post extensive impairments (c.US$228.5m) booked on
    1. assets and associate/JV stakes values; and
    2. new asset deposits (cancelled in 2016).

Upgrade to Neutral; better clarity post AOD restructuring 

  • We upgrade our call to NEUTRAL (from REDUCE) with a higher Target Price of S$0.142 (still on -1 s.d. level of 0.43x P/BV) as we roll forward our valuations to CY18. 
  • Upside risks are an uplift in ascribed P/BV to -0.5 s.d./average mean range of 0.55-0.6x upon a favourable Seadrill deal (minimal impairments). 
  • Downside risks include lower-than-expected contract wins.

Potential M&A or privatisation candidate 

  • Mermaid Maritime (MMT) is an M&A or potential privatisation candidate, in our view. From an M&A perspective, a tie-up with other offshore companies and purchase of new relevant assets could accord it scale and clout (which it is now currently missing) to participate in future tenders/awards. 
  • Major shareholder THORESEN THAI AGENCIES PLC has sufficient debt headroom (3Q17 net gearing at c.0.13x) and a buyout at Mermaid Maritime's current share price would cost it a mere US$47m (for 22.7% stake).

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2018-01-12
CIMB Research SGX Stock Analyst Report HOLD Upgrade REDUCE 0.142 Up 0.140