Asset expansion plan rolls into motion. In line with expectations in our initiation report dated 3 Jan 2014, Mermaid has placed orders for the construction of two new tender drilling rigs and a subsea dive support vessel (DSV) worth a total of USD436m. This sets forth the first steps in a new era of growth, which we postulate would see the company evolve into an integrated oilfield services player as it expands its asset base. Reiterate Buy with SGD0.61 TP, based on 14x FY9/14E EPS and supported by a 59% three-year EPS CAGR over FY9/13-16E.

Two tender rigs at USD149m each. The two tender rigs were placed with China Merchants Industry Holdings (CMHI) at a price of USD149m per unit. USD14.9m cash will be paid on contract execution and another USD7.1m within 30 days thereafter for each rig, representing 15% of the total cost. The remaining would be paid on delivery of the rigs in Mar 2016 and Jun 2016. The next step for Mermaid is to secure charter contracts which we believe could come relatively easily from either (1) new drilling demand in the Asia-Pacific region or (2) substitution of charters currently carried out by other players in Thailand or for PTTEP.

A DSV at USD138m. As expected, Mermaid also placed a USD138m order for DSV with the same yard. For this, USD20.4m will be paid upfront and the remainder upon delivery in Sep 2016. With subsea orderbook of USD592m as at FY9/13, it needs to charter in additional vessels to support its committed contracts. The new DSV would help expand its capacity and continue to support growth in the subsea segment.

Funded by recent rights and placement. These purchases will be funded by USD140m cash raised recently. Mermaid remains our top small-cap pick within the oil and gas sector. In our view, the market has yet to fully appreciate the potential of the company. With strong industry fundamentals and backed by a politically well-connected board (Mahagitsiri family and ex-PTT CEO), there are ample opportunities for Mermaid, especially in its home ground Thailand. For details, please refer to our initiation report “Things are going swimmingly” dated 3 Jan 2014.

Source: Maybank Kim Eng Research - 10 Jan 2014