Ann: Trading Update, page-48

Interesting thread and good discussion on here, thanks to all contributors.

There's clearly a lot of moving parts and sensitivities here to any sort of attempt to derive a valuation for MRM, given: 1) earnings uncertainty, 2) capital structure / equity raise uncertainty, and 3) ongoing asset sales program. Where i got to after spending a few hours on it, was to say a few things:

- I believe in cycles, and i believe that this very sharp oil price cycle will stabilize and recover over time, implying a gradual recovery in demand for MRM's services.
- If you believe in the cyclical recovery, you are probably going to be in this stock for at least two years because demand for their services will lag the price recovery.
- I believe MRM are probably going to have to raise equity given difficulty in asset sales programs, depressed earnings and elevated leverage. If they don't, then great, that's upside for ordinary holders given the shareholder equity dilution has been avoided, provided that management's alternative to raising capital isn't something potentially worse (like selling key assets such as Dampier at absolute rock-bottom, bottom-of-cycle multiples, thus capping the upside).

I think the key to understanding where all the dust settles after a few years, and what potential return scenarios can be, can be captured in a fairly basic financial model, which i've posted below. This is very much an 80/20, Pareto Principal exercise, insofar as i know it omits a lot of detail (equity raise costs, cash flows to FY19 etc.), but i put the together below as an intended framework to help my thinking about valuation ranges for this stock. Some key disclaimers:

- The FY19 EBITDA divisional numbers are, quite literally, very random guesses. This is a huge driver of potential equity value, so i'd need to spend a lot more time understanding the sustainable earnings capacity of each division before going any further with this. I suspect some keen observers of this stock would have much more to say on the potential, sustainable earnings profile of each division, given the current asset base, in a more balanced market (and let's assume the market gradually moves to a more balanced scenario by FY19).

- The equity raise is clearly a huge input to potential valuation, and needs to be framed with reference to: a) how much MRM is likely to raise, and 2) at what discount to prevailing market price. Suffice to say, the more MRM raise relative to their existing market cap, the steeper the discount to prevailing market price the equity raise will be. In any event, it's hard to see how an equity raise in MRM in its current state is done close to stock trade price, given it's a distressed equity raise.

With that said, set out below is the framework i put together (took me all of about 30 minutes, so excuse the complete roughness and complete lack of justification for any of the numbers - at this stage i just wanted to share the framework, knowing that refining all the inputs is the time-consuming exercise). I welcome comments (and excuse the formatting):

	Column 1	Column 2	Column 3
0	{colgroup}
1	{col=308x@}{/col}{col=144x@}{/col}{col=148x@}{/col}
2	{/colgroup}
3		Bull	Bear
4	Boats FY19 EBITDA	150	75
5	Dampier SB FY19 EBITDA	40	20
6	Dampier SW FY19 EBITDA	5
7	FY19 EBITDA pre Broome and overhead	195	95
8	EBITDA multiple applied	8	6
9	MRM EV (pre Broome and overhead)	1560	570
10	Broome NPAT (50%)	3	2
11	Broome NPAT multiple	12	10
12	Broome EV to MRM	36	20
13	MRM EV (incl. Broome), pre overhead	1596	590
14	Central admin costs (overhead)	10	10
15	EV on overhead	10	10
16	EV of overhead	-100	-100
17	MRM EV (incl. Broome), post overhead	1496	490
18
19	Current SOI	373.2	373.2
20	Current Net Debt	342.1	342.1
21	Equity raised	50	100
22	Current SP	$0.28	$0.28
23	Equity raise discount to current SP	-25%	-40%
24	Raising price	$0.21	$0.17
25	New shares issued	238.1	595.2
26	Revised SOI	611.3	968.4
27	Revised net debt post equity raise	292.1	242.1
28
29	EV less net debt (impl. equity value)	$1,204	$248
30	Implied FY19 equity value per share	$1.97	$0.26
31	Targeted return p.a.(WACC)	30%	30%
32	Current date	1/21/2017	1/21/2017
33	Exit date	6/30/2019	6/30/2019
34	Years to exit	2.4	2.4
35	Discount factor given time to exit and WACC	1.9	1.9
36	Imputed PV of equity per share	$1.04	$0.13

With that as a framework, maybe holders / potential holders could have a go at firming up key parameters, which i think are:

1) Potential earnings profile for each division of the balance in, say, FY19 when the market is forecast to have stabilized a little. Some reference to past earnings, and future likely movements in day rates and utilization would be a logical place to start.

2) How much equity MRM might be forced to raise, and at what discount. I plucked from thin air $50m at 25% discount as a minimum, and $100m at 40% discount as a maximum, without really checking where these outcomes would leave the business (i.e. whether that's enough to stabilize the capital structure).

3) What sort of EBITDA exit multiple could be expected. To me, this "feels" like a 6x-8x EBITDA business, on a stabilized / regular basis.

4) I picked 30% as a targeted annual return to back into an NPV but, to be honest, a stock this highly levered with such a range of potential outcomes for equity holders, would probably only get me interested at 50%+ p.a. returns.

Thanks