Rickmers Maritime - Share price may see a re-rating should capex funding be resolved

RMT’s management is still evaluating options for the funding of four containerships of US$712m to be chartered out to Maersk in 2H10. Should this funding issue be resolved, its share price may see a re-rating.

We met up with the management of Rickmers Maritime (RMT) yesterday and discussed the funding of US$712m capex due in 2010 relating to the purchase of four 13,100 TEU containerships to be chartered out to Maersk for 10 years at a daily time charter rate of US$56,491 in 2H10.

Four possible options on the unfunded capex. They are: a) equity/debt funding, possibly on 30:70 basis, b) selling the vessels, c) sale and leaseback and d) settlement with Rickmers Group, the original owner of the four vessels. A total deposit of US$40m (5.6% of vessel cost) for the vessels is payable to RMT’s parent company Rickmers Group one year before the expected delivery date ie. Jul-Sep 09. The balance amount of US$672m (94.4%) will be paid upon delivery of the vessels in 2H10.

Penalty charges include the deposit and interest payment of 2% above US$ LIBOR. According to RMT’s circular released in Apr 08, the company will be liable for a penalty charge of 2% above US$ LIBOR p.a. on the unpaid amount of the vessel cost if it is late in payment upon delivery of the vessels. Should RMT default on the vessel payment for more than five business days after the due payment date, the deposit of US$10m each for the four Maersk vessels and interest charge of 2% over 3-month US$ LIBOR p.a. on the unpaid amount shall be forfeited to Rickmers Group.

Asset deflation might have breached LTV covenants. RMT’s management has guided containership prices without charter contracts have fallen about 30-50% from the peak in 2008 and only expects the shipping market to pick up in two years’ time. We do not rule out a breach in RMT’s loan-to-value (LTV) covenants of 90% in view of the recent collapse in ship values. That said, the trust is in discussion with its bankers on the possible waiver of the LTV covenants. Should asset prices continue to fall and RMT is unable to obtain a waiver of its LTV covenants, bankers may require the trust to reduce its dividend payout in order to partially pay down its loans or levy a higher cost of borrowing on the company.

Renegotiation of charter rates by the charterers. While RMT’s charterers are top liner companies such as A.P. Moller–Maersk, CMA CMG, Mitsui O.S.K. Lines, Hanjin Shipping and Italia Marittima, there is always the possibility that some charterers may renegotiate charter rates in view of the lack of sharp fall in cargo shipment demand and an oversupply of containerships in the shipping market.

RMT’s share price has risen 53% ytd and we forecast DPU yield of 19.6% and 17.6% for 2009 and 2010 respectively. While our fair price of S$0.76 is 28% above its current share price, we maintain our HOLD call in view of its unfunded US$712m capex due in 2010. However, we see a re-rating in RMT should the trust manage to resolve its financing hurdle. Our fair price of S$0.76 is based on 2010 P/B of 0.4x, a shade below US peer Danaos’ P/B of 0.5x as RMT would have a similarly very high gearing of 4.0x, assuming debt financing for US$712m capex.

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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.

Ezra - Pushed back project commencement date of EOC’s Thailand FPSO

We maintain our Sell/High Risk recommendation. While recent S$92.4mn share placement will improve balance sheet strength, we deem Ezra’s earnings in FY10-11 as riskier and possibly lumpy as growth will come from yard order book fulfillment (we note no new orders since May-2008), and energy services (high operating leverage as equipment are bareboat chartered-in). Additionally, there is a risk of over-paying for potential acquisitions or slower than expected integration of acquisition target. Valuations are also unattractive – current core business forward PE of 11x is above the industry average of 7x.

Our target price of S$0.95 is based on a sum-of-the-parts valuation, comprising S$0.61/share from Ezra's core business based on 6x FY-Aug-10E PER, S$0.24/share from Ezra's 48.9% stake in Oslo Bors-listed EOC Limited, based on 3.5x Feb-10E EOC earnings and adjusted for Ezra's stake, and S$0.09/share from Ezra's 15.5% stake in SGX-listed Ezion Holdings (based on market value).

We use PER to value Ezra's core businesses as we believe investors will shift focus to the quality of Ezra's near-term earnings instead of the company's asset growth. Our target PER of 3.5x FY-Aug-10E is at ~15% discount to industry average of 7x. While earnings visibility from Ezra's long-term charters would justify a premium to industry PER, this is more than offset by earnings volatility which may persist due to: i) FX fluctuations; ii) greater proportion of revenues from lump-sum projects (e.g. yards, energy services) where margins and execution time-frame (hence revenue recognition) are less predictable. Valuations may stay depressed as a result.

Our target PER of 3.5x for EOC implies ~65% valuation discount to other offshore construction and production peers, justified by EOC's poorer than expected execution of the Thailand FPSO project, potential heavy capex for its Vietnam FPSO project (assuming it wins), and potential one-off charges to be incurred from project delays or inability to secure financing for Vietnam FPSO.