Mermaid Maritime - In a sweet spot


■ With its subsea vessels gainfully employed in the Middle East, MMT’s 3Q15 core net profit of US$15.9m was above our and consensus’s expectations.

■ Targeting US$12m cost savings in 2016, which we have not fully taken into account.

■ Increase FY15 core EPS by 10% to factor the earnings beat. Expect qoq weaker results as seasonal demand comes down and conservatism creeps in.

■ 3Q15 represents MMT’s best ever quarter. Good results underline our Add call.

3Q15: in a sweet spot
At 70% of our FY15 EPS (9M at 65%), we consider MMT’s 3Q15 core net profit of US$15.9m (+22% yoy; +9% qoq) to be ahead of our and consensus’s expectations. The beat came from better subsea utilisation. We estimate that subsea achieved utilisation is in the low-80s (2Q15: 74%), as MMT has successfully deployed its vessels in the Middle East, where activities are still high. There were no contributions from drilling as MTR-1 and -2 are cold-stacked. MMT has a healthy net gearing of 0.1x (FY15F: 0.1x).

10% reduction in AOD’s day rates has not been reflected
Owing to the structure of the contract, we note that the 10% reduction in AOD’s day rates has not sieved through the P&L. MMT concedes that it is only a matter of time before the reduction is reflected. In our earnings model, our associates’ contributions have factored in the 10% cut since Apr 15. Also, we now do not expect day rates to revert to the original US$180k/d in end-Mar 16, when the 1-year cut ends. We expect AOD to re-contract its jack-ups at c.US$160k/d, a 10% discount to US$180k/d.

EBITDA margins propped up by lower depreciation charges
We note that EBITDA margins are propped up by lower depreciation charges. Depreciation for MTR-2 and Mermaid Siam has ceased, as the two vessels have been re-classified as held-for-sale at the start of 2015. However, there is a likelihood that both units might not be sold this year due to the tougher climate. Conservatively, our depreciation expenses have factored in the c.US$3m p.a. charge, should the vessels be reinstated as PPE. This partially explains why we are expecting a weaker 4Q15.

Targeting US$12m cost savings in 2016 MMT is targeting to reduce its workforce by 15%, mainly through the release of its operating drilling team (US$6m cost savings) and the withdrawal of onsite shipyard supervision of its newbuilds in China (US$6m). We also understand that the company has successfully negotiated the return of chartered-in Windermere in Dec, which will reduce fixed costs. The charter-in cost for the vessel was US$15m p.a. Our forecasts have not taken into account the full scale of the cost-savings. Conservatively shave our FY16-17 EPS by 11-13%
Looking ahead, there are many moving parts for the stock, in terms of whether MMT will eventually take delivery of the newbuilds as well as subsea volatility. 2015 has been a decent year for subsea IMR but the sub-segment could feel the lagging effects of the oil tumult, as a substantial number of DSVs globally could come off-hire together in end-15. For this reason, we conservatively shave our FY16-17 EPS by 11-13%.

Technical Analysis
Daily Chart
Good results underline our Add rating
Nonetheless, 3Q15 represents MMT’s best ever quarter and the stock is the only one in our coverage to beat expectations during this reporting season. We maintain our Add rating with a higher target price, now based on 0.4x CY16 P/BV (0.4x CY15 P/BV previously), as we roll over our valuation to end-16. (Read Report)

Source : CIMB Research

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