Pressure Mounts On MMA Offshore

This story features MMA OFFSHORE LIMITED. For more info SHARE ANALYSIS: MRM

-Difficult to unlock value
-Cheap on several metrics
-Focus on cost cutting targets
 

By Eva Brocklehurst

Marine services business, MMA Offshore ((MRM)), is under a lot of pressure. Contracts are under review by customers as they revise expenditure plans. The company has signalled Australian fleet utilisation fell to around 60% from 82% in the March quarter and day rates are down 10-15%. International vessel utilisation is around 60% as well and day rates are down 15-30%. Supply base activity in Western Australia is also down sharply. Little improvement is expected in the June quarter.

Deutsche Bank observes a solid amount of work remains in place but margins will still be affected by the fierce competition for what work is available. The broker expects a successful outcome on the Gorgon production load-out tender while Dampier slipway activity remains firm, if subdued.  The company expects FY15 underlying profit around $54m, similar to FY14. A cost cutting target of $15m per annum has been reiterated and there are several tender opportunities being pursued. Deutsche Bank reduces FY15 estimates by 11% and FY16 by 33% on the back of the update.

The broker understands investor sentiment has been negative for some time, as the fall in the price of oil raises concerns over the longer-term outlook in Australia, beyond the completion of the next few significant projects in FY17-18 such as Ichthys, Wheatstone and Prelude. Despite the underlying value in the stock, and reasonable operating cash flow that can be generated even in a depressed market, the broker finds a lack of catalysts to unlock that value in the near term.

Beyond FY15 Macquarie notes that as Western Australian LNG spending declines, the company's Australian earnings and revenue will weaken as well. The broker forecasts a 15.1% fall in FY16 revenue and a further 3.3% fall in FY17 before revenue stabilises in FY18. Meanwhile, the company's balance sheet metrics are viewed as reasonable with interest cover forecast to be strong, partially because of low interest rates on US dollar debt taken on to fund the Jaya acquisition.

Macquarie assumes no vessel sales in forecasts. Should any be forthcoming, this could lower debt levels materially. Whilst the stock is considered cheap if forecasts are correct, the broker acknowledges it is still early days in terms of MMA Offshore's customer response to the lower oil price.

Comments around utilisation and day rates were softer than Canaccord Genuity expected but the broker still considers the stock as an attractive value investment, based on very appealing multiples, a high level of asset backing and impressive cash flow yield. Canaccord Genuity lowers its target to $1.34 and retains a Buy rating. The vessel sales program is continuing. The company has signed sales agreements on two barges and expects to make additional sales in coming months. The broker expects a minor loss on the sale of the two barges.

The broker observes there are five new vessels arriving over the next 12-18 months which should support earnings growth, while the major contract with Inpex is expected to start mid 2016. The current capital expenditure program is to be completed in FY16 and no additional purchases are then expected until FY18. The net result, in Canaccord Genuity's estimates, is a rapid increase in free cash flow yield to almost 40% by FY18 from 16% in FY15.

Investors are likely to seek out any signs that utilisation rates are stabilising and delivery on cost reduction targets, Morgan Stanley believes. Moreover, the broker expects investors will want to see value realised through the vessel sales program. In terms of international vessels, the broker highlights, while the market is very challenging, management believes current utilisation rates can be sustained.

UBS also argues that despite the downgrades, the stock is cheap on a number of metrics. The broker calculates that net tangible assets per share at $2.19 and book value at $2.35 are now just 3.2-3.5 times the current share price. The broker's revised target, down to 94c from $1.35, suggests the vessel operations only need to re-rate to 0.46 times the current share price. This multiple is currently in the range of 0.25-0.36 times.

There are two Buy ratings and four Hold on FNArena's database. The consensus target, which excludes Canaccord Genuity, is $1.00, which suggests 43.4% upside to the last share price. Targets range from 75c (Deutsche Bank) to $1.65 (Morgan Stanley). The consensus dividend yield on FY15 estimates is 10.9% while on FY16 estimates it is 8.5%.
 

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