Mermaid Maritime - DBS Research 2018-08-16: Earnings Recovery Ahead

MERMAID MARITIME PUBLIC CO LTD SGX:DU4

Mermaid Maritime - Earnings Recovery Ahead

Mermaid Maritime’s 2Q18 net loss of US$7.7m larger than expected.
Overall fleet utilisation still low as one key vessel was drydocked for majority of quarter; improvement expected in 2H18.
Seeing recovery in tendering activity in the Middle East.
Balance sheet remains in healthy position.

Although we did expect a weak quarter on drydocking of one key vessel, net losses in 2Q18 were larger than expected on the back of a steep fall in revenues and one-off increase in SG&A costs. We believe revenues will ramp up in 2H18 as all four key vessels are on contracts during the period, which should result in breakeven earnings or minor profits in 2H18.
Mermaid Maritime’s FY19 earnings should be positive as well, as order win momentum is showing signs of improving, amid higher penetration into the Middle East market, but execution risks remain. We will turn more positive on the stock if we see sustained evidence of new order wins and a turnaround in profitability in 2H18.
Meanwhile, Mermaid Maritime’s share price should be supported by its undemanding valuation (~0.3x P/BV) and lack of balance sheet stress. Thus, we maintain our HOLD call on the stock with an unchanged Target Price of S$0.13.

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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. This provides comfort that downside risks are very limited.

Significant contract awards on its key vessels could help Mermaid’s share price re-rate upwards.

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 34%-owned associate Asia Offshore Drilling (AOD), giving us a Target Price of S$0.13.

Poor returns on the property investment in Cambodia could adversely impact sentiment. A lack of replenishment of the orderbook will also bode poorly for the company.

Mermaid Maritime reported net losses of US$7.7m in 2Q18, substantially higher than our expectations of about US$3m net losses. This was due to lower than expected workload for Mermaid’s key owned subsea vessels, drydock of one vessel and lack of work for one chartered-in vessel.
Mermaid Maritime’s 2Q18 revenues came in at US$21.5m, down 52% y-o-y, and total vessel utilisation was 33%, lower than 42% recorded in 2Q17.
Mermaid Asiana was drydocked for a majority of the quarter, which was expected, but chartered-in vessel Resolution was not contracted in 2Q18 and will be returned to its owner in 3Q18. This leaves Mermaid with 4 key owned vessels – Commander, Endurer, Asiana and Sapphire, of which 3 will be working in the Middle East in the near term.

Contributions from associate Asia Offshore Drilling (AOD) improved to US$3.0m in 2Q18 from around US$1.3m in 1Q18 as the bareboat charter rate to AOD was adjusted and backdated to January 2018, thereby having the effect of reducing operating expenses. All three AOD rigs remain fully utilised and contracted till 2019. Going forward, we expect associate contributions to be closer to the US$2.0m level over the next few quarters.

Mermaid Maritime’s orderbook was at US$165m at end-2Q18, slightly lower than end-1Q18’s level of US$173m, but this does not include the recently announced new contract worth US$16m from a National Oil Company (NOC) in Qatar. Mermaid’s orderbook is currently heavily skewed to Middle East contracts (96% of orderbook), likely mostly from NOCs in Gulf states. Approximately 34% of this orderbook will be recognised in 2H18, and the remainder 66% in 2019. This points to revenue improvement in 2H18 and beyond, compared to the weak 1H18.
Management indicated that the market environment remains challenging, but Mermaid continues to see a gradual recovery in subsea tendering activity especially in the Middle East.
Mermaid is sourcing new projects in Kuwait currently. It is also formulating a MOU with a European EPCI company to focus on Gulf of Thailand decommissioning works scheduled for the latter part of 2019.

As stated earlier, three of Mermaid’s key vessels – the Asiana, Endurer and Sapphire – are expected to be working in the Middle East region in the near term and the company is hopeful of securing more orders as countries like Saudi Arabia, Kuwait and UAE are trying to boost production levels and should be tendering for more inspection, repair, maintenance jobs to enhance production from existing offshore fields.

Mermaid Maritime’s operating cash flows remained positive in 1H18 owing to positive working capital movements and balance sheet remains healthy with Mermaid in a slight net cash position.
No near term liquidity or solvency issues are anticipated at Mermaid or its associate AOD, following debt restructuring at AOD level announced earlier in April 2018. The only concern could be regarding the status of its investment in Cambodian property business through the acquisition of 49% stake in PTGC Co (an entity with land in Phnom Penh, Cambodia) for US$19.7m in late 2017, which is part of management’s strategy to utilise part of its cash reserves to boost investment returns while maintaining enough liquidity for core business operations. Poor returns on this investment in future could affect sentiment.

Suvro SARKAR DBS Group Research | https://www.dbsvickers.com/ 2018-08-16

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