Excerpts from analyst's report

DBS Vickers analyst:
Suvro SARKAR
 

550 Mermaid AsianaMermaid Maritime: Target price S$0.27 (0.5x FY15F P/BV). Photo: Company
» Strong subsea utilisation, cable-lay contribution and discount on chartered-in fleet lift profit by 19% y-o-y

» Revising FY15/16 revenues and earnings upward to acaccount for stronger-than-expected performance

» Contract wins and M&A could provide catalysts

» Maintain BUY with TP of S$0.27

Outlook

Orderbook expected to edge up slightly; long-term chartered-in vessels to be returned upon job completion.  While the group’s strong performance is encouraging, its orderbook has depleted to US$212m as of 3Q15, down from a high of US$473m at end- FY14. However, the fourth and first quarters of the year are peak bidding seasons, with Mermaid currently in the process of bidding for some jobs. Hence the group expects the orderbook to edge up over the next few months.

However, the group has negotiated for a penalty-free return of its three long-term chartered-in vessels post-completion of their current jobs, which means the orderbook is unlikely to return to its previous highs; the Nusantara (ex-Windermere) and Endeavour are working on projects ending in Dec 2015 and February 2016 respectively, while the Resolution is on-hire until December 2016. This represents an assumption of a less aggressive strategy that reflects softer markets, which should result in lower revenues but could boost margins.

Still a good play for exposure to the maintenance phase.  Mermaid’s 80% utilisation of its subsea fleet in 3Q15 was a good showing, and demonstrates the resilience of the maintenance phase of the oil & gas extraction cycle, as oil majors have chosen to mostly cut capex rather than opex to survive a depressed oil price environment. Strategic Offshore Research expects 2015 to be the trough year for subsea vessel demand, which is then forecasted to grow at a roughly 5% CAGR from 2016-2019.

Strong balance sheet with headroom for acquisitions.  Mermaid’s net gearing remains negligible at ~0.1x versus a peer avereage of about 0.8x, which gives the group leeway to take on additional debt on the balance sheet for acquisitions. The group recently established a US$500m multicurrency debt issuance programme; given that capex requirements for the Ausana (~US$100m outstanding) and the new tender rigs (~US$300m total outstanding) should be funded through project debt and internal cash reserves, this new debt facility could be used for M&A activity.

SuvroSarkar8.15"Valuation: 

Our TP is revised up slightly to S$0.27 (0.5x FY15F P/BV) as we raised FY15/16 earnings to reflect the stronger-than-expected performance in 3Q15. The stock looks cheap from a P/BV viewpoint at current levels. Maintain our BUY call; catalysts should come from sustained profitability and positive news on the tender rigs." - Suvro Sarkar (photo).            

Key Risks: 
Subsea engineering operations are sensitive to delays in the award of offshore projects.  The short-term nature of shallow water subsea projects makes Mermaid's subsea engineering revenue sensitive to delays in the award of projects, which oil majors have recently tended towards.                      

New tender rigs could find themselves jobless. Management has noted that there seems to be some extra capacity in the tender rig market of late. The MTR-3 and MTR-4, still slated to be delivered in 2016, could find themselves without secured contracts if the oil crisis prolongs. 

Drilling segment susceptible to rate revisions. Given that the three rigs are still enjoying premium dayrates of around US$160k each after re-negotiation with Saudi Aramco, these remain susceptible to further rate downside at the point of charter renewals. 

Full report here. 


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