Mermaid Maritime PCL - Chop & change makes for a rudderless ship (CIMB)

NEUTRAL Downgraded

S$0.29 Target: S$0.31

Mkt.Cap: S$224m/US$177m

Offshore & Marine

Impending departure of CEO

Mermaid yesterday announced that its CEO, Mr Denis Welch, will be leaving the company at the end of this month. We view the constant changes in its senior management negatively. Although no radical impact on its business operations is expected, a perceived lack of direction is damaging, in our view. In addition, while valuations are only 0.4x P/BV, we believe Mermaid would at best perform in line with the market amid negative sentiment and as such, downgrade it to NEUTRAL from OUTPERFORM. We keep our earnings estimates but lower our target price to S$0.31, now based on 0.5x CY11 P/BV, the bottom end of its trading range (previously S$0.49, 0.8x CY11 P/BV). We would revisit the stock when there is better clarity on its strategic direction, better-than-expected quarterly performances or favourable contracts for its newbuild jack-ups.

The news

CEO leaving. Mermaid yesterday announced that its CEO Mr Denis Welch will be leaving at the end of this month. Mr Welch was appointed CEO only in February this year. Mermaid did not indicating whom his replacement might be.

Our comments. We do not expect the recent spate of senior-management changes to have a major detrimental impact on its business operations. We still expect a turnaround in its subsea business, strengthened by recent significant appointments to its subsea team. However, constant changes in management should be unsettling for employees and investors, giving rise to a perceived lack of direction.

Valuation and recommendation

Downgrade to Neutral from Outperform. While valuations are only 0.4x P/BV, we believe Mermaid would at best perform in line with the market amid negative sentiment and as such, downgrade it to NEUTRAL. We keep our earnings estimates while cutting our target price to S$0.31, now based on 0.5x CY11 P/BV, the bottom end of its trading range (previously S$0.49, 0.8x CY11 P/BV). We would revisit the stock when there is better clarity on its strategic direction, better-than-expected quarterly performances or favourable contracts for its newbuild jack-ups.