MMA Offshore Ltd (ASX: MRM) is a maritime company offering fleet services to companies like oil and gas explorers and producers. On a number of points, MMA's share price looks ridiculously cheap.
- The company is trading on around one-quarter of net tangible assets. On its balance sheet at the end of June 2015, MMA had net assets of $779 million, most of that in property, plant and equipment (PPE) or tangible assets, and a market cap of roughly 183 million. In simple terms, MMA has $2.10 per share in tangible assets and a share price of $0.26.
- Last financial year MMA generated operating cash flows of $185 million. In other words, the company is trading on a price to cash flow ratio of less than 1, (market cap / operating cash flow).
- The company paid a dividend of 5.5 cents last financial year, which equates to a trailing dividend yield of around 21%
- 3 directors jumped into the market last week and bought shares – 100,000; 200,000 and 1.25 million shares. That suggests they think the share price is cheap.
Those figures suggest MMA Offshore is a screaming bargain – no wonder directors jumped into the market and bought more shares. But before you switch to your online broker and click the Buy button, you might want to read on…
The key questions are:
Is the company's PPE actually worth $779 million?
In a fire sale, would the company realise that value? Even applying a 50% discount means shares are worth twice as much as they are trading at. The company has already taken a $120 million charge against the carrying value of its assets, including $100 million against its fleet and $20 million against the goodwill associated with the Dampier Supply Base. That suggests the assets should be worth roughly what they are stated at on the company's balance sheet.
But the problem is – like we saw with mining equipment over the past few years – it's virtually worthless if it can't be put to use (utilised), and MMA is having trouble putting all its assets to work.
Can the company continue to generate operating cash flow of $185 million going forward?
Even if operating cash flow was halved, shares look cheap. The company did say that the second half was severely affected by the falling oil price, compounded by completion of a number of construction projects in Australia (e.g. Chevron's Gorgon LNG project and completion of the SubSea 7 contract).
Looking at the second half financials (working back from full year data less first half data), operating cash flow plunged 43%, and forecasts suggest MMA won't be able to realise cash flows anywhere near what it produced last financial year.
Looking closer at MMA's divisions might reveal more clues…
Vessels are its primary business
Utilisation rates for vessels in 2015 was 70%, but that includes a fall to 65% in the second half. MMA said leasing and hire rates were cut by up to 30% in the second half, as competition increases while work available is falling drastically. The company says visibility in the vessel market is 'very challenging' and rates and utilisation expected to remain under pressure through the next 12 months.
Deep water drilling has declined along with oil price, as oil companies try and cut back on non-essential expenditure.
The company also says that significant competition in small vessel space – which has low barriers to entry, and is a commoditised market, particularly for AHT & AHTS (Anchor Handling Tugs and Tug Supply vessels), which are used to tow and anchor oil rigs.
In the mid to large vessel space, there are large order books for new builds – which will add even more pressure to market and MMA says some owners are laying up vessels (basically taking them out of service) to reduce costs. The company says there is an excess of large PSVs (Platform supply vessels), but is still pushing ahead and says it still has $130 million capital expenditure remaining on 5 new vessels. That's an issue, adding to the oversupply of PSVs, and likely to see utilisation rates fall even further when the vessels are received.
Other divisions
The company says reduced construction and drilling activity is impacting the performance of its Dampier Supply Base.
Dampier Slipway and Broome Supply Base JV are only small contributors to performance, but it should be noted that MMA management expected a strong second half of 2015 from the Slipway – but revenues fell 9% and EBITDA was crushed, falling from $0.7 million to a loss of $0.2 million.
Financials
| First half | Second half | Full year | Change 2nd half | |
| Revenues | 456.3 | 340.4 | 796.7 | -25% |
| EBITDA | 132.0 | 86.2 | 218.2 | -35% |
| Profit before tax | 55.3 | 17.2 | 72.5 | -69% |
| Net profit | 37.7 | 17.6 | 55.3 | -53% |
| Earnings per share | 10.3 | 4.7 | 15.0 | -54% |
| Operating cash flow | 118.4 | 67.0 | 185.4 | -43% |
Source: Company reports, my calculations for second half
The second half of the 2015 financial year was a shocker for MMA, with revenues falling 25% and net profit 53%. Operating cash flow plunged 43%. Not only is MMA being forced to compete for contracts at reduced rates, the company is winning less, putting significant pressure on margins and earnings. With a number of Australian projects finishing and oil prices remaining low, MMA's 2016 financial results are very likely to be another tale of woe, resulting in the dividend being cancelled.
If you think about MMA in a similar vein to mining equipment suppliers like Emeco Holdings Limited (ASX: EHL) – you'll get an idea of what MMA is facing. Emeco has a share price of 4 cents, and NTA per share of 37 cents, with the share price losing 95% of its value over the past 5 years as the mining boom ended.
Foolish takeaway
MMA Offshore shares are cheap – but they are cheap for a reason and could easily get cheaper. The dividend is almost certainly going to be cut this financial year. With $440 million of debt, the biggest risk facing shareholders is that MMA could be forced to raise more capital and issue millions of shares at a huge discount to the current price to shore up its balance sheet.
The worst case scenario could see MMA fall into administration because it failed to meet its debt covenants, which would likely result in shareholders losing 100% of their capital.
