Mermaid Maritime - A breeze of new life in FY10

Tender rig fleet to fetch better charter rates for new contracts. Mermaid’s existing two tender rigs are still working on contracts that were secured at lower charter rates, which are about 30% below current market rates. We expect these two rigs to fetch 25% higher rates upon expiry of existing contracts, and have assumed three and a half months downtime before they can be deployed for their next offshore jobs. Mermaid would also take delivery of a newbuild tender rig by early FY10, which would provide further earnings lift.

Subsea Division’s contribution to be boosted by 3 new vessels. Mermaid’s current fleet of seven subsea vessels would be gradually boosted to ten in FY10, with full year contributions in FY11. We have factored in 0- 17% dip, vs. record levels in charter rates for Mermaid’s specialized subsea vessels. This is reasonable, given the mild 0-12% dip to-date (vs. peak levels) and the stable rates for the group’s 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). Mermaid is expected to fund its committed capex through internally generated cash flows and external debt, with net gearing at 0.1-0.3x in FY09-11. Our fair value for Mermaid stays at S$0.85, using 7x and 10x blended FY09/10 PE for its subsea engineering business and drilling services, respectively. Maintain BUY.

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