Mermaid Maritime - DBS Research 2019-03-15: Poor Numbers, No Recovery In Sight


Mermaid Maritime - Poor Numbers, No Recovery In Sight

  • Mermaid Maritime's 4Q18 net loss of US$11.6m much wider than expectations.
  • Utilisation of key vessels dips to record low of 35% amid stiff competition in subsea vessel space.
  • Associate income from Asia Offshore Drilling (AOD) could also come under pressure as rigs are renewed at lower day rates.
  • Downgrade to SELL with lower Target Price of S$0.06; suspending coverage on the stock.

Downgrade to SELL and suspending coverage as earnings improvement seems a long way off.

  • Utilisation of key vessels plummeted to an all-time low (key working vessel utilisation at 35%) in 4Q18, while day rates continued to be muted. Hence, MERMAID MARITIME PUBLIC CO LTD (SGX:DU4)'s net loss of US$11.6m in 4Q18 and US$27.2m in FY18 was much wider than expected.
  • Subsea order win momentum for Mermaid Maritime has unfortunately not shown any significant signs of picking up owing to stiff competition, and orderbook stood at only US$95m at end-FY18, after consecutive quarters of declines. Hence, we believe there will be no respite from heavy losses in FY19/20 as well.
  • Over at associate Asia Offshore Drilling (AOD), one of the rigs managed to secure a 3-year charter extension from the customer but day rates were significantly lower than the previous contract, and could imply breakeven numbers at best. Thus, we see no upside to remaining invested in Mermaid Maritime in the foreseeable future, and are suspending coverage on the stock.
  • Rating cut to SELL with a revised Target Price of S$0.06.

Where We Differ:

  • Mermaid Maritime has a relatively healthy balance sheet, with no liquidity or solvency issues, and has generated positive cash flows in FY18, but in the absence of meaningful investment opportunities and its lack of scale as a niche subsea services operator, growth options are limited.

Potential catalyst:


  • We base our valuation of Mermaid Maritime’s core subsea business (excluding stacked vessels) on a lower P/BV peg of 0.4x (from 0.5x earlier to account for lower earnings forecast) and ascribe zero value to 34%-owned associate Asia Offshore Drilling (AOD), which gives us a revised lower Target Price of S$0.06.

Key Risks to Our View:

  • Poor returns on the property investment in Cambodia could adversely impact sentiment. A lack of orderbook replenishment also bodes poorly for the company’s prospects.

WHAT’S NEW - 4Q18 losses wider than expectations, recovery not yet in sight

Net earnings slipped deeper into the red.

  • Mermaid Maritime's 4Q18 net loss widened to US$11.6m from US$1.9m in 3Q18, and was below our expectations of a slight net loss. Revenue in the quarter fell to US$25.8m (-12% q-o-q, -23% y-o-y), as subsea vessel utilisation plummeted to an all-time low (key working vessel utilization at 35%), while day rates continued to be muted.

Associate performance steady as anticipated, but future earnings is under pressure.

  • Profits from AOD grew to US$1.9m in 4Q18, as all three drilling rigs remained under contract in the quarter. However, the future appears less promising, as only one of the three rigs is currently on a long-term contract till 2022, while contracts for the other two rigs will mature in July and December 2019.
  • Though AOD has an established track record with the operator, and might secure contract extensions later, stiff competition in the region has eroded day rates, and will lower Mermaid Maritime’s share of profits from AOD. Day rates for the latest contract extension for one of the AOD rigs seems to be around US$73k/day (US$80m contract for 3 years), which is materially lower than the previous day rate of around US$100k/day.

Order book declines again as order wins continue to be elusive.

  • Excluding a newly awarded US$17m project in the Middle East, Mermaid Maritime’s orderbook stood at US$95m at end FY18, after three quarters of consecutive declines from the 1Q18 level of US$173m. The current orderbook is still entirely concentrated in the Middle East, with 100% set to be recognised in 2019.
  • Three of Mermaid Maritime’s key vessels – Asiana, Endurer and Sapphire - will be engaged in the Middle East throughout 2019, and the company is hopeful of clinching more contracts for its other vessels in the region.

Expansion to new project types and geographies to be gradual.

  • Mermaid Maritime is looking at the SURF, subsea cable installation and deepwater operations space in global markets, and should it win any contracts, the company hopes to hire a large Offshore Subsea Construction Vessel to fulfill the job. Capabilities are already in place, but intense competition from top-tier subsea players will constrain its progress.
  • Mermaid Maritime is also looking to explore opportunities in non-traditional markets outside Asia-Pacific and Middle East, like the Mediterranean, North Sea, West Africa and the Americas. However, a breakthrough appears remote for now, due to its limited geographic presence and the current positioning of its vessels.

Sustained balance sheet strength is the only chief positive.

  • Balance sheet remains healthy with Mermaid Maritime having only minor net debt position (0.04x net debt/ equity) as at end FY18. No near term liquidity or solvency issues are anticipated at Mermaid Maritime or its associate AOD, following debt restructuring at the AOD level announced earlier in April 2018.
  • Management indicated that the company is looking to dispose of non-competitive assets, and could take advantage of inorganic or organic growth opportunities, should they arise.

Not out of the woods yet, suspending coverage until we see clearer signs of a turnaround.

  • There continues to be a lack of visible earnings catalysts in the near-term, despite an increase in offshore activity in Mermaid Maritime’s key geographic regions. In light of the challenging operating environment, yet another of
  • Mermaid Maritime’s vessels, Commander, is undergoing cold stacking. This brings the tally of stacked vessels to four, and reduces the number of vessels available for work.
  • Future contracts will likely only breakeven on a cash basis, owing to downward pressure on day rates, as we foresee Mermaid offering more discounts to maximise utilisation. Meanwhile, decommissioning works in the Gulf of Thailand, which were initially scheduled for the latter part of 2019, will only begin in FY20, according to the management. The tentative project value is still unknown, and we believe the project is susceptible to further delays because of project complexity.
  • Due to the absence of any favourable developments and muted earnings outlook in the near-term for Mermaid Maritime, we recommend looking at other names in the sector for exposure to the offshore services recovery story.
  • SEMBCORP MARINE LTD (SGX:S51) is our top pick.

Suvro SARKAR DBS Group Research | Singapore Research Team DBS Research | 2019-03-15
SGX Stock Analyst Report SELL DOWNGRADE HOLD 0.06 DOWN 0.130