Mermaid Maritime: A niche offshore play

High earnings visibility from tender rigs. Mermaid provides niche tender rig drilling to the production phase of offshore oil fields in South East Asia. These contracts are typically long-term in nature, and stretch 2-5 years. We expect growth of this business to be underpinned by: 1) Higher utilisation of its tender rigs, with mandatory servicing after every five years completed in mid-2008, 2) Impending rig delivery by early FY10, and 3) Re-pricing of tender rig contract up by 27-33% (using rates secured in February 2009), vs. contracted rates in mid-2005 and early 2006.

Versatile and specialised subsea services. Mermaid has a fleet of subsea vessels/equipment and tender rigs, and an experienced group of in-house/sub-contracted divers to provide customised services to its clients. We believe that our earnings forecasts are realistic after factoring in 0-17% dip in charter rates for Mermaid’s specialized subsea vessels, in view of: 1) the mild 0-12% dip to-date (vs. peak levels), and 2) Stable rates for recent contracts in early June 2009.

BUY into strong growth in FY10. We expect Mermaid to deliver 60% net profit CAGR in the FY10-11 periods (FYE Sept). Note that Mermaid’s recurring net profit is projected to dip 20% y-o-y in FY09 to Bt933.6m, due to a one-off poor 2Q09. Despite committed capex for one tender rig and two vessels, Mermaid’s net gearing is a healthy 0.3x in FY09-10. We are initiating coverage on Mermaid with a BUY recommendation, with a fair value of S$0.85, based on 7x and 10x blended FY09/10 PE for its subsea engineering business and drilling services respectively.

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