Mermaid Maritime - Much improved risk-reward profile
- Newbuilds cancelled in mutual agreement with shipyard; lifts big financing risk overhang.
- Associate rig AOD III secures contract renewal.
- Indonesian subsea vessel chartered-in for another year, signaling improved work prospects in region.
Upgrade to BUY as risks dissipate; Mermaid now looks set to escape the downturn relatively unscathed.
- Mermaid’s recent announcements regarding the cancellation of its two newbuild tender rigs and one Diving Support Vessel (which entailed c.US$380m in remaining capex commitments) puts to rest the risk of obtaining financing associated with those units.
- With more good news coming from a 3-year contract extension secured for associate jack-up rig AOD III, we are now turning positive on the stock due to a more favourable risk-reward profile.
- Mermaid has low gearing of c.0.11x with no bonds and no capex outstanding – a big comfort factor. Though the stock has rallied, we believe some upside remains on the table – our P/BV valuation derives a TP of S$0.24, implying 29% upside.
- Chances of privatisation by parent Thoresen Thai and its associated promoter group provides further upside potential.
Low orderbook remains a worry, but higher oil prices should help lift maintenance/repair activity.
- Mermaid’s orderbook has declined to US$155m as of 3Q16 from a high of US$473m at end-FY14 due to a dearth of maintenance and repair work. However, higher and more stable oil prices post-OPEC deal should have a trickle-down effect on maintenance work, especially in 2H17 (due to a lag effect).
- Mermaid has recently extended the charter of its Indonesian-flagged vessel by another year instead of returning it, thus signaling higher confidence in order win prospects in the region, going forward.
- As the key risks surrounding newbuild capex have now dissipated, we raise our P/BV peg to 0.7x – slightly above our peg for POSH, our top choice amongst SGX-listed OSV operators, yielding a new TP of S$0.24, representing a c.29% upside.
- Our 2-stage DCF (9.2% WACC; terminal growth 1%) valuation, used as a cross-check measure, also supports this.
Key Risks to Our View
- A lack of orderbook renewal in FY17 would fuel uncertainty over earnings and potentially depress the share price.