We met up with Mermaid Maritime recently. Mermaid’s share price has risen strongly by ~30% since it announced its 4QFY13 results (FYE 30 Sep) on 27 Nov 2013. We believe this re-rating has been driven by its turnaround story and robust outlook.

Below are some salient points of our discussion:

Mermaid is an owner and operator of a diversified fleet of subsea vessels and drilling rigs providing a complete suite of turnkey services to the oil and gas industry.

Strong earnings visibility as US$318.4m of its US$650m order book (excluding contract options) is expected to be recognised in FY14. This already exceeds FY13 total service income of US$269.6m by 18%. Its current tender book is ~US$2b.

Largest customer is Saudi Aramco, the state-owned oil company of Saudi Arabia. This is due to its large US$530m five years plus a two year option subsea contract (Mermaid’s share is 60-70% of this), which commenced in Oct 2012. Other key customers include Chevron, Pertamina, PTT, Exxon Mobil and Total.

We expect to see a surge in contribution from its 33.8%-owned associate AOD in FY14 due to a full year of contribution from its three Keppel FELS jack-up rigs. All three have been awarded drilling contracts by Saudi Aramco for a period of three years (with one year extension option) worth an aggregate of almost US$700m (estimated day rate of US$180k/day each). The three jack-up rigs commenced operations only in May, Jul and Oct 2013 and contributed US$4.4m to Mermaid’s FY13 PBT.

Recently placed orders for two self-erected drilling tender rigs and one Multi-Purpose Subsea Dive Support and Construction Vessel (DSCV) worth a total of US$436m. Delivery is scheduled for 1Q and 2QCY16 for the tender rigs and 3QCY16 for the Subsea DSCV. We believe the tender rigs and Subsea DSCV may command charter rates of US$120-130k/day and US$140-150k/day, respectively, in the future.

Currently trading at 12.4x PER and 1.03x P/B based on FY14F Bloomberg consensus estimates. We do not have a rating on Mermaid. There are 2 BUY ratings and 1 HOLD rating on Mermaid, with an average target price of S$0.56, according to Bloomberg.

Source: OCBC Research - 22 Jan 2014