Ann: Trading Update, page-50

As with all models, the GIGO (garbage in, garbage out) rule applies, but i have re-read discussion on this thread and i think some are potentially underestimating the size and dilution likely to occur in the event of an equity raise. I tend to agree with others that their only hope of avoiding the equity raise is a sale of Dampier as it's a large enough and sale-able enough asset to cover the $75m near-term debt repayment obligations, but i don't know who the potential buyers are and whether they've got the cash to pay in this market (i use "i don't know" in the sense of me genuinely not knowing who potential buyers, rather than expressing doubt as to likelihood of it coming to pass).

I think the size and dilution of an equity raise could negatively surprise some due to some fairly basic math which shows MRM's net debt position may materially degenerate between FY16 and 1HFY17, via:

Cash trading loss: Talking round numbers, the business did ~$9m EBITDA in 2HFY16 ($7m boats + $6m Dampier + $1m Broome - $4m central costs). It's pretty clear to me that 1HFY17 will be worse, given the momentum of the business (i.e. they went from $67m EBITDA in 1HFY16 to $9m the next half!) and the language used in the October and December trading updates, where it was indicated that $20m EBITDA is the full-year target, but clearly mostly weighted toward 2HFY17 given African vessel re-deployment costs and lack of contribution in 1H from newly completed vessels. If i assume an EBITDA break-even 1HFY17 (implying $20m 2HFY17), which i don't think is overly unrealistic, then they still have to pay interest costs out of that which might be $7-$8m for the half, which would be a cash trading loss of $8m.


Newbuild vessel capex spend: MRM had to spend $7.5 in completion capex on their newbuilds (this is in footnote 22(b) in the FY16 AR), and they would have spent deployment costs to service the contracts those newbuilds have won. I'll estimate this total cash drain as ~$10m, and it will pretty much all be absorbed in 1HFY17.

Stay-in-business capex: Aside from building shiny new boats, MRM has to spend a certain amount of capex just to keep things ticking over each year, regardless of how operations are going. Their disclosure on this is poor, and i have difficulty estimating what it is because they've been continually expanding their fleet over the last 5 years but it's not made clear in any given reporting period how much capex is linked to empire building (shiny, new stuff), and how much to keeping the existing fleet afloat. Their stay-in-business maintenance capex figures will become a lot clearer in FY17 because that's what they'll be spending, in addition to the $7m they were pre-committed to spend completing the newbuild program, as above...not to mention the fact that i'm pretty sure MRM's banking syndicate will strictly forbid MRM's management from spending a single cent more on capex than is absolutely necessary, for quite a few years, given the heartache caused by years of reckless capital allocation. In any event, i suspect FY17 maintenance capex will be less than D&A as the D&A profile on newly constructed assets will run well ahead of cash flow - even if i am generous and say they'll actually only spend 30% of FY16 D&A on maintenance capex in FY17, that's still (30% * $90m) = $27m, or $12-$15m per half.


Net cash position impact: So, taking the above 3 items into account, i'd estimate MRM's net debt position could be $20-$30m worse come 1HFY17. That's assuming no movement in their net working capital position - i suppose it's possible they suck some cash out of NWC by pushing out payables and converting receivables to cash, albeit this is a business that consistently shows a balance sheet with receivables being ~1.5x payables, which is consistent with their FY16 position, i.e. i don't expect them to be able to suck cash out of their working capital to meet liquidity calls.

So, putting all that together, i'll have a stab and say their net debt will go from ~$342m to $360-$370m at 31 Dec 2016. This doesn't necessarily sound like much, but it matters because it increases the size of the likely equity raise they'll have to conduct to dig themselves out, and the bigger the equity raise relative to market cap, the bigger the discount to prevailing share price has to be to get investors interested. In my prior post i said a "bear" case was $100m raised at a 40% discount to prevailing stock price, and i don't think that's out of the world unrealistic.

One other thing i think MRM investors are potentially neglecting as well in their assessment of likelihood of equity raise vs. asset sale to solve liquidity problem, is the human element and conflicts of interests in these situations. Generally, it's an easier solve for a management team to blow its existing shareholders up with a highly dilutive equity raise in order to placate its banking syndicate, than it is to sell a key asset...not to mention the fact that MRM's capital adviser would also be recommending a capital raise, so they get their capital raise fee. I also imagine it will be psychologically very difficult for MRM management to sell out of Dampier at bottom-of-cycle valuations, given they've spent years building that asset and would no doubt see it as a jewel in their empire, and if there's one thing management generally don't like doing (particularly those with low levels of stock ownership), it's reducing the size of their empires. I'd put it like this: unless it's significantly easier for MRM to sell Dampier than raise equity, i'd have my money on them raising equity - STO is a relevant and very recent example of a company in the same situation.