Mermaid Maritime - CIMB Research 2018-02-28: Asian Offshore Drilling Plans Still Pending

Mermaid Maritime - CIMB Research 2018-02-28: Asian Offshore Drilling Plans Still Pending MERMAID MARITIME PUBLIC CO LTD DU4.SI

Mermaid Maritime - Asian Offshore Drilling Plans Still Pending

  • Mermaid Maritime (MMT) FY17 core net profit (US$3.1m) missed expectations at 67.8/91.8% of our/consensus estimates (S$4.6m/S$3.4m) on lower-than-expected gross profit margins.
  • In acquisition mode in 2018 to expand regional presence and service offerings.
  • Borrowings are still low hence MMT has sufficient headroom for acquisitions.
  • Asian Offshore Drilling (AOD) financing resolution still pending. Closure could be by Apr 18 as a balloon payment is due then, in our view.
  • Maintain HOLD with a slightly higher Target Price of S$0.158, now based on 0.48x CY18F P/BV (vs. 0.43x). We await AOD/Seadrill update for better clarity.

FY17: a tough year 

  • Mermaid Maritime (MMT) FY17 revenue fell 21.9% y-o-y to US$144.7m (FY16: US$185.2m) due to execution of fewer projects and lack of cable lay contracts. Average utilisation of four major vessels (Commander/Asiana/Endurer/Sapphire) fell to 56% (from 65% in FY16). 
  • The lower revenue and lower Asian Offshore Drilling (AOD) associate income of US$4.7m (FY16: US$11.5m), due to a contract revision; led to 85.7% decline in FY17 net profit.

Order book lower; FY18F new wins may be back-ended 

  • End-FY17 order book stood at US$148m (vs. end-4Q16: US$171m). Large global subsea companies, such as Subsea7 and TechnipFMC, mentioned a gradual recovery in tendering activity and guided for awards from 1H18F during their 3Q17 results. 
  • However, Mermaid Maritime previously guided that its portion of such awards typically lags major companies. As such, we believe Mermaid Maritime would likely see contract wins towards the latter part of FY18F.

Watch out for 1Q18 sluggishness; new order wins needed for FY19 

  • Three vessels are due for dry docking exercises in early-FY18F; hence, 1QFY18 could see a net loss. For the rest of FY18, revenue will largely be driven by the existing order book, and likely contract wins from regional repositioning of key assets. Mermaid Endurer and Sapphire are now in the Middle East. 
  • We lower our FY18-19F EPS by 30.4-32.6% on lower GPMs, but this has negligible impact on Mermaid Maritime’s book value which is already depressed following massive asset write-downs in FY15.

Moving to acquisition mode 

  • In 2018, Mermaid Maritime is looking to expand its presence to North Sea, West Africa, Malaysia and Persian Gulf; hence, it is open to purchasing distressed assets where appropriate. We are not surprised by this, as we previously mentioned consolidation or asset purchases could accord it scale and clout (which it is currently missing) to participate in future tenders/awards. 
  • As at end-17, Mermaid Maritime had negligible net gearing hence, it likely has enough balance sheet headroom to participate in acquisitions, in our view.

AOD re-financing plans still pending; closure could be by Apr 

  • Mermaid Maritime said negotiations on AOD re-financing are ongoing. We believe a decision could be made by Apr 18 when the balloon payment of US$180m for a US$209m Senior Secured Credit Facility is due, and given Seadrill announced a global settlement on its Chapter 11 case on 26 Feb. 
  • At end-17, Mermaid Maritime’s investments in associates were c.US$88.9m (c.26% of equity) which we believe could be at risk if AOD negotiations take a negative turn.

Maintain HOLD and Target Price; await Seadrill decision for better clarity 

  • We believe the current 0.4x FY18F P/BV valuation has at least priced in the write-off of its investments in associates. However, near-term upside is capped until there is clarity on Seadrill financing. 
  • Maintain HOLD but raise Target Price to S$0.158, now based on 0.48x CY18F P/BV (0.43x CY18F previously), near -0.5 s.d. from 5-year mean. 
  • Upside/downside risks: higher/lower contract wins and margins. Another downside risk is unfavourable AOD outcome.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2018-02-28
CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.158 Up 0.142