May 17, 2017

While Mermaid Maritime continues to generate positive operating cash flows and is likely to remain in the black in FY17/18 despite the challenging operating environment, we advocate caution in the near term owing to the overhang caused by ongoing debt restructuring efforts at Seadrill, the majority partner at Mermaid’s key associate Asia Offshore Drilling (AOD).

If Seadrill is unable to successfully negotiate restructuring terms and is forced to liquidate, there may be significant impairment losses related to Mermaid’s investment in AOD – given the US$180m balloon repayment of AOD credit facility due in April 2018 – and contracts for the three AOD-owned drilling rigs may also come under the scanner. Under these circumstances, we ascribe a lower P/BV multiple to Mermaid’s investment in AOD and at our revised TP of S$0.20, we believe upside potential is not attractive enough.

Mermaid’s 1Q17 core losses of about US$0.5m were in line with expectations, as were reported revenues. We expect a return to profits of c.US$3-4m in 2Q17/3Q17 as vessel utilisation picks up from seasonal lows. Meanwhile, JV/associate income fell to US$1.2m this quarter as the full effect of the AOD rigs’ day rate reduction was felt, but should stabilise at this level going forward.

We maintain our P/BV peg at 0.7x for Mermaid’s core subsea IRM business but ascribe a lower peg of 0.25x, lowering our TP to S$0.20 accordingly. HOLD, downgrade from Buy. –DBS

Mermaid Maritime closed at: S$0.176