NO changes to our EPS estimates or target price, still at 0.7x CY2012 P/BV. We met newly appointed CEO Bruce Gemmell, CFO Siriwan Chamnannarongsak and the subsea operational team, who outlined initiatives to turn around the subsea business.
Improvement in utilisation day rates and margins are reflective of the work done so far. We expect subsea to make further headway with plans to integrate the three subsea business units into one. This enables the group to more effectively deploy personnel and assets across markets to maintain utilisation.
Earnings risks are on the upside, as we have conservatively projected a 68 per cent utilisation rate for FY2012 - comparable to the 69 per cent in FY2011. Average projected day rates are also lower at about US$48,000 as compared to the US$52,000 achieved in FY2011.
We expect much stronger drilling contributions in H2 FY2012. That will be the first time both tender rigs, MTR-1 and MTR-2, will be gainfully employed. We expect MTR-2 to extend its contract with Chevron Indonesia ending in April 2012. Further, we expect contracts for its newbuild jack-ups by H2, which could re-rate Mermaid's share price, in our view.
We recommend investors buy ahead of a strong H2. Downside risks are limited with the stock trading at 0.5x CY2012 P/BV.
In addition, CY2012 EV/Ebitda of 3x highlights its strong operating cash flow generation and implies a cash payback of three years.
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