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Broker's Take: 'Add' call on Mermaid Maritime, target price S$0.45

CIMB RESEARCH has maintained its "add" call on Mermaid Maritime, a provider of subsea and drilling services for the offshore oil and gas industry.

The research house said the company's FY2014 core net profit tripled to US$44.4 million, underpinned by full-year contribution of Asia Offshore Drilling Limited (AOD) and the five-year US$500 million Saudi Aramco subsea contract.

Noting that the core net profit was slightly below its expectations, CIMB said there was hefty downtime of Mermaid Siam and MTR-2 being on work-over mode since June.

"The rig remains on work-over mode and we now expect it to stay this way till the end of its contract with Chevron Indonesia in May 2015. Additionally, Mermaid announced its intention to pay out a total of 25 per cent of its FY2014 profits, upon repatriation of AOD's profits."

For now, CIMB said the company has declared 15 per cent of its profits, with the balance to be announced in Q4 CY2014, adding that it now expects the 25 per cent payout to be sustained.

CIMB said that despite the depressed oil price environment and a consolidation in the subsea specialist space (Hallin Marine, a Singapore-based company with global operations, has been shut down by its parent, US-listed Superior Energy, while North Sea-based Harkand has pulled out from Asia), Mermaid is curiously taking on more operating leverage by chartering several high-end dive support vessels (DSVs).

"Notably, it has chartered in Windermere, Hallin's ex-flagship DSV, for five plus five years at a cost of US$15 million per annum (the DSV had been purchased by privately-held Miclyn Express Offshore)."

Renamed Mermaid Nusantara, the Indonesian-flagged vessel will be marketed to Indonesian waters, said CIMB.

Mermaid has also chartered Bourbon Evolution (eight plus eight months) and Mubarak Supporter (one plus one plus one year) to serve the Middle East market.

"While we applaud Mermaid's attempts to eke out incremental profits and expand its market share, we are also cognisant that the increased operating leverage could be an earnings drag if the company fails to secure work."