My thesis for MRM is pretty simple – it’s the ultimate high-leverage play for a turnaround in the global O&G market. Sentiment and activity within the sector is aligned to the oil price, which has trended upwards, despite volatility, since a market low in Q3FY17 of ~USD30 p/bbl. Consensus forecast are for the Brent oil price to remain >USD60p/bbl for FY20, which is proposed to drive a significant increase in project sanctioning to 2022, where MRM is well positioned to capitalise.
The Offshore Support Vessel (OSV) market has bottomed and the market recovery is
being led by younger vessels which are experiencing stronger utilisation rates as a result of rationalisation of supply over the preceding 2 years. Older stock has been decommissioned, with prohibitive reactivation costs and lower demand given age for these to re-enter the market.
In the short-term, OSV market dynamics would appear favourable to MMA, with significant forecast increase in project sanctioning underpinned by higher oil prices, restricted supply of younger vessels, coupled with cost of vessel reactivation, creating a shortage of ‘warm’ vessels – which should drive improvements in utilisation and rates – which gives you enhanced profitability and ROA.
Love the acquisition of NMS undertaken in late 2019. Opportunistic, being at a low point in the cycle, and assists in expanding MMA’s subsea service offering, which should improve ROA via providing additional services to capture a greater proportion of the value chain through the combination of MMA’s vessels and NMS’s subsea equipment and technical expertise.
The giant millstone here is ~$270m in debt which his due to mature in 2021. Current Debt to EBITDA is ~10x (frightening). However with EBITDA growing at 50% in FY19, continuing the trajectory makes this much more manageable as debt maturity approaches. If we compound a 35% EBITDA growth rate, then Debt to EBITDA at FY21 would be ~5x – which although high probably reflects the capital intensity and high barriers to entry of the industry – and should enable MMA to comfortably refinance for a further term.
My valuation on a EV/EBITDA basis is as follows and assumes a compound EBITDA growth rate of 35%; no debt repayment, cash holdings held stagnant (historically MRM EBITDA is a good proxy for free cashflow):
FY19 FY20 FY21
EBITDA 26.9 36.4 49.1
EV 365 365 365
EV/EBITDA 13.6x 10.0x 7.4x
As its currently trading @ ~14x EV/EBITDA, this provides price targets as follows:
0.17 0.35 0.65
That’s 100% upside if they execute. And… If it all turns to shit, in a wind-up scenario there is ~$0.35 in NTA per share, with the existing fleet levered at ~42% - which less costs implies a ~50-75% upside from current price.
I’m entering this position now in the lead-up to release of half yearly earnings, which I believe will be the catalyst to making progress towards that FY20 $0.35 price target.