OUTPERFORM Maintained
S$0.28 Target: S$0.49
Mkt.Cap: S$222m/US$183m
Offshore & Marine
Starting with the man in the mirror
New management team working to unlock shareholder value. We took Mermaid’s new CEO, Mr Denis Welch (former CEO of Drydocks World - Southeast Asia where he managed the post-acquisition of Labroy Marine and Pan United Marine) and its investor relations head Mr Howard Woon on a one-day NDR in Singapore. Refreshingly candid, management acknowledged its past mistakes and updated investors on Mermaid’s current business operations. While investors generally agreed that the current share price provides value, we sense that most are also adopting a “wait-and-see” approach. Nonetheless, the key investment case lies in its current trading price which is below break-up value. There are no changes to our earnings estimates or target price of S$0.49, still based on 0.8x CY11 P/BV. We maintain our OUTPERFORM rating. Improvements in quarterly results may win investors over while mid-term catalysts could come from contracts for its newbuild jack-ups.
Takeaways
Improvements in subsea. On the back of aggressive bidding and seasonality, utilisation for 3QFY11 surged to 75% compared to 54% in 2QFY11 and 57% in 3QFY10. As a result, the subsea arm turned around to post an operating profit of THB120m (margin of 11%) following five successive quarters of losses. Management now anticipates utilisation for 4Q to be above 65% (4Q10: 27%). In addition, the division has already clinched around US$50m worth of orders for FY12 or 36% of our subsea revenue forecast for that fiscal year.
More work to be done. Management intends to further improve the profitability of the subsea arm by i) upgrading the soft systems (IT, work processes/systems); ii) reducing fixed operating costs (such as lowering crew terms and salaries to be in line with the market); iii) increasing revenue captured per vessel (i.e. converting more chartering work to turnkey subsea jobs where additional subsea engineering services are provided); and iv) relocating the subsea commercial base to Singapore. Two senior personnel have been recruited to enhance tendering competitiveness and increase value-added services. Lastly, Mermaid has engaged Norwegian investment bank RS Platou to embark on a strategic review of the fleet.
Drilling: steady as she goes. The company secured in July a 270-day contract worth US$26.5m from Chevron Indonesia for the MTR-2 that will keep the rig busy until 3QFY12. The operation of the MTR-2 has remained steady with the rig having achieved its milestone of two years without any loss-time incidents. In addition, MTR-1 is currently awaiting a decision from Chevron Indonesia for her to be employed as an accommodation barge. The decision will be made in the next few weeks. Subject to Indonesian cabotage principles, the tender rig could be reflagged.
Seadrill’s Asia Offshore Drilling (AOD) stake may help win contracts. Investors were curious about Seadrill’s participation in AOD. Seadrill and Mermaid each hold 33.75% in AOD. Firmly in-the-money jack-up rigs (average newbuild price of US$181m vs. current estimated price of US$190m), favourable payment terms (20:80) and early delivery dates were cited as the main reasons for Seadrill’s participation. Moreover, Seadrill’s cost of investment was at some 15% discount to Mermaid’s. Management guided that following the cash infusion, AOD may exercise its second jack-up option by Sep 2011.
Although Seadrill’s involvement in AOD has been downplayed to that of a financial investor, the unit’s chances of securing drilling contracts have increased. More significantly, it has reduced forfeiture risk of its 20% downpayment for new rigs. This is especially crucial in a climate where over 90% of the newbuild jack-ups are built on highly speculative projections of future demand. Mermaid targets to secure contracts for its newbuilds by 1H12 which could significantly catalyse its share price.
Valuation and recommendation
Maintain Outperform. The target price remains unchanged at S$0.49, still based on 0.8x CY11 P/BV. With the share price trading below break-up value, investors could profit from any asset divestitures. Improvements in quarterly results could win confidence from investors. The mid-term catalysts include contracts for its newbuild jack-ups. We maintain our OUTPERFORM rating.
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