Mermaid cuts losses on KM-1

Mermaid Maritime announced on 21 June that it had sold off its stake in the KM-1 tender rig project, which has been plagued with delays. The disposal will result in a loss of US$7.35 million to the company, about a $0.013 hit to tangible book value of approximately $0.72.

The KM-1 was expected to be a key source of earnings going forward, which explains the sharp selloff following the news. While the move is highly disappointing, valuing the company based on its book value (and huge cash horde) shows that the stock now trades at a 35% discount to book (factoring in the loss on KM-1). At such a steep discount, we are reluctant to sell, but we are cognisant that how management deploys its current cash holdings (as well as the cash to be received for the disposal transaction) will be critical to the company's success.

The stock has certainly been a major disappointment, but the company is likely to have over $110 million in cash at the end of 2010 (current market value is $365 million), and we will watch to see what opportunities this cash horde will buy at the end of the year. We are not keen on adding to our small holding in the company given the lower conviction we have in the management (which recently saw the departure of its Managing Director), but will look to see how the company deploys the vast funds it has at its disposal.