Mermaid Maritime - DBS Research 2018-05-17: No Reason To Get Excited

MERMAID MARITIME PUBLIC CO LTD SGX: DU4

Mermaid Maritime - No Reason To Get Excited

Mermaid Maritime's 1Q18 net loss of US$6m was larger than expected.
Overall fleet utilisation down to 25% as two key vessels were drydocked for scheduled surveys.
Orderbook up c.17% q-o-q to US$173m.
Buyer found for the MTR-1 and MTR-2 tender rigs.

Although we did expect a weak quarter on drydocking of two key vessels, net losses in 1Q18 were larger than expected, as other working vessels also saw softer workloads.

2Q18 should continue to present some weakness as the Asiana vessel is still in drydock through most of May. Meanwhile, though the orderbook is up q-o-q, we note that 2Q/3Q tend to be slow quarters in terms of order wins.
On the plus side, Mermaid has a healthy balance sheet and thus does not warrant to trade at distressed valuations as seen in other O&M stocks.
Overall, we think Mermaid’s risk-reward trade-off is neutral at this point: the lacklustre near-term outlook and lack of near-term catalysts are offset by undemanding valuation (~0.45x P/BV) and lack of balance sheet stress. Thus, we maintain our HOLD call on the stock, but adjusting for higher-than-expected losses and lower book value, as well as movements in the SGD/USD, our Target Price is lowered to S$0.13 (from S$0.14 previously).

We note that Mermaid has impaired an above-average proportion of book value of its vessel fleet (c.30%), so P/BV ratios are more conservative.

We base our valuation of Mermaid’s core subsea business (excluding stacked vessels) on a P/BV peg of 0.6x and ascribe zero value to associate Asia Offshore Drilling, giving us a Target Price of S$0.13.

Poor returns on the PTGC investment could adversely impact sentiment. A lack of replenishment of the orderbook or deferment/cancellation of jobs also bodes poorly for the company.

Mermaid recorded a net loss for 1Q18 of c.US$6m on low in utilisation rates as 2 out of 4 of its key vessels (Endurer and Commander) were drydocked for their scheduled maintenance/surveys, which was expected, but other vessels in service had experienced lower utilisation. The magnitude of losses was larger than we had forecasted.
Overall vessel utilisation was down to 25% (vs. 36% in 1Q17) while the 4 major vessels (Commander, Asiana, Endurer, Sapphire) saw utilisation of 39% (vs. 48% in 1Q17).

Orderbook inched up slightly q-o-q from US$148m as of 4Q17 to US$173m as of 1Q18, as Mermaid secured an extension for one of its vessels working on a long-term contract in the Middle East.
Of its orderbook, 81% is for work in the Middle East, with about half to be recognized in 2018 and the remainder in 2019. However, we note that 2Q/3Q tend to be weak quarters in terms of orders wins for Mermaid historically, so we would be cautious in extrapolating the orderbook trend in 1Q18 to 2Q/3Q18.

Mermaid has found a buyer for two old tender rigs, MTR-1 and MTR-2, which it has been trying to sell for some time now. The price was not disclosed, but the sale will save Mermaid c.US$700k per annum in stacking costs from 2Q18 onwards when the rigs are expected to be delivered to the buyer.

Mermaid had provided an update on its associate Asia Offshore Drilling’s (AOD) debt refinancing situation on 4 April 2018. Seadrill is a majority shareholder in AOD while Mermaid owns c.33.8%.
Mermaid and Seadrill have entered into a Transaction Support Agreement where AOD will become a party to the Seadrill restructuring package, as proposed earlier by Seadrill. This lifts an overhang on Mermaid’s stock as previously the company had said it was intending to pursue refinancing outside of Seadrill’s restructuring plan, but had not shown much progress on that front, leading to worries over the eventual outcome of the refinancing.
To recap, AOD has c.US$210m in bank debt outstanding, of which c.US$180m balloon was due in April, with AOD’s cash balance insufficient to fund this.

AOD Credit Facility maturity to be extended by 5 years on average
No loan amortisation payment obligations until 31 December 2019
3.5 year covenant holiday
More flexible financial covenants, including deferring financial covenant testing until 2021 (with the exception of the minimum liquidity covenant)
Additionally, Mermaid and Seadrill have agreed to a put and call option on Mermaid’s shares in AOD:
- Put option – exercisable by Mermaid between 1 Oct 2019 and 30 Sep 2020. Valuation based on independent rig brokers and financial expert assessment and subject to a ceiling of US$125m
- Call option – exercisable by Seadrill between 1 Oct 2020 and 31 Mar 2021 (just after Mermaid’s put expiry date). Subject to a floor price of US$75m

Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | https://www.dbsvickers.com/ 2018-05-17

SGX Stock Analyst Report HOLD Maintain HOLD 0.13 Down 0.140