He adds: “With high operating leverage due to their big fleet size amidst an industry upcycle, MMT has hit critical mass, and we expect further increases in revenue to significantly contribute to their bottom line.”
For the FY2024 and FY2025, Yon writes that the market has not “fully acknowledged” MMT’s robust momentum in securing orders, which promises significantly increased revenue and profit visibility.
Furthermore, the analyst notes that the downturn in the oil and gas industry for the past seven years has eliminated several of MMT’s competitors. This, coupled with it having “one of the largest and skilled dive teams”, enables the company to secure delayed projects which are only resurfacing now.
“Due to the scarcity of DSV vessels and elevated charter prices, MMT can now have pricing power,” writes Yon.
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The cessation of production of numerous oil wells in the next decade across the Asia Pacific (APAC) and Thailand also allows MMT to be a prime beneficiary of the expected increase in decommissioning orders.
As projects in the industry tend to have a short life span, excluding further contract wins, MMT will have a 60% to 65% current order book recognised in FY2024.
“Despite more than doubling its order book in six months from US$337 million ($457 million) in 1HFY2023 to US$734 million, MMT has continued to secure multiple contracts across Southeast Asia (SEA), the Middle East and Africa to replenish its order book. We expect MMT’s win momentum to continue and the order book to cross $1 billion, giving further visibility beyond FY2024,” writes Yon.
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Meanwhile, the company also stands to benefit from its extensive fleet as charter rates continue to soar.
Yon notes: “Charter rates are now near 2008’s high, and any rate increase above MMT’s cost structure directly feeds into MMT’s bottom line. Older contracts entered before FY2023 should also expire soon, and any new agreements made should reflect the higher charter rates seen in today’s market.”
Despite the spike in share price, MMT’s valuations continue to be “undemanding”, trading at eight times forward P/E.
“Given our expected net profit of US$25 million for FY2024, we value MMT at 12.5 times price-to-equity ratio (P/E) by applying a 15% discount to peer estimates P/E of 14.7 times due to its small-cap nature," says the analyst.
Yon is also hopeful of a “possible dividend surprise”, which can be well supported by MMT’s current operating cash flow.
Risks noted by him include the cyclical nature of the oil and gas sector, a decline in oil prices which would impact oil majors’ decision to spend, thus limiting MMT’s order books, and lastly, the possible need for a cash call, which will be essential as MMT plans to expand its operations and undertake larger projects.
As at 4.33 pm, shares in Mermaid Maritime are trading 1.5 cents higher or 7.90% up at 21 cents.
