The American writer Gore Vidal said that, after age fifty, litigation replaces sex. A young company like MMA Offshore (founded in 1989) might want to stay out of the courts then, based on its latest full year results (here). MMA reported a loss of AU$94 million (US$69.1 million) for the twelve months to June 30, including significant provisions for court cases in both Singapore and Saudi Arabia, and large impairments on ROVs and vessels held for sale (AU$57.7 million (US$42.4 million)). In the prior year, the net loss had been AU$37 million (US$27.2 million).
MMA reported:
"Provisions for doubtful debts contributed a total of AU$13.2 million to one-off costs. Of this amount, MMA has provided for an additional credit loss of AU$11.9 million for a major debtor in the Kingdom of Saudi Arabia… a portion of the debt (US$6.1 million) is secured by Promissory Notes which are a form of court enforceable security in KSA. MMA is currently enforcing the payments under the Promissory Notes in the KSA Execution Courts, however, the impact of the Covid-19 pandemic, being either Court closures or Court delays, is affecting our ability to enforce the Court orders and collect the outstanding amounts due.
MMA also has a number of legal claims currently in progress relating to contractual disputes and has raised provisions totalling AU$9.0 million for potential costs associated with these claims."
Good luck to MMA pursuing its claim against a Saudi Arabian debtor in a Saudi Arabian court. We wait with bated breath for news of a positive outcome from the judge in Riyadh or Dammam, as POSH received in 2019, after three years of litigation (here), although POSH never subsequently announced collection of the award, to our knowledge.
We had assumed that the AU$9 million (US$6.62 million) of MMA's legal claims costs included provisions for the arbitration with Jebsen and Jessen, the Singaporean crane manufacturer, which we reported here. Sadly, this does not appear to be the case, as we shall see below.
MMA's results showed the mixed benefits of its efforts to diversify its business, through the acquisition of Neptune Marine Services, the Australian-based ROV and subsea player. MMA boasted that "annualised cost synergies of approximately AU$5 million have been achieved, in excess of the original estimated AU$2 million per annum".
Unfortunately, the ROV business remains loss-making. Whilst MMA's subsea revenue for the period from November 2019 was AU$46 million (US$33.81 million), there was an EBITDA loss of AU$0.7 million (US$0.51 million) there, even with an AU$0.6 million (US$0.44 million) benefit from a change in accounting policy. MMA did not comment on whether the former Neptune business was cash positive, and what the net loss was.
MMA was at pains to demonstrate the success that its subsea business has had in the defence and windfarm sectors, with wins in Taiwan's windfarm projects (here) and a contract with the Australian navy to survey an area north-east of Broome, Western Australia later this year.
If the acquisition of Neptune and its survey and ROV business does indeed create strategic options for MMA, even if it is losing money, one has to question its acquisition of a quartet of project logistics businesses managed by a team which was formerly with MEO and Pacific Radiance. Again, diversification was the mantra, and MMA declared that the new business segment has the "aim of targeting logistics scopes associated with large LNG and offshore wind projects in East Africa and Taiwan."
We had earlier reported (here) that MMA was chartering a landing craft in East Africa through this newly acquired project logistics team. In its results, MMA was pleased to report that "the business is beginning to gain traction and currently has three third-party vessels engaged on contracts in East Africa predominantly supporting Total's Mozambique LNG Project, as well as a third-party vessel under contract in Taiwan," generating revenue of AU$7 million (US$5.15 million) for the financial year, but delivering an underlying EBITDA loss of AU$3 million (US$2.21 million).
Then came the kicker. "The reported result for the segment included an US$8.4 million provision against legacy legal claims." So, it seems that the litigation cost is not relating to the Jebsen and Jessen crane arbitration in Singapore, but to the project logistics division which the company only just bought!
How is this possible? Was any due diligence done? MMA took on a US$8 million liability for an 80 per cent share in a business, which makes a loss, and which, by its own admission, "was in the early stage of development, with no assets or contracts at date of acquisition".
Who wouldn't want a large vessel owner to come in and backstop US$8 million of legal claims and then be paid for the privilege? The MMA Offshore report notes, "included in the transaction agreement is a contingent consideration arrangement to pay the non-controlling interests up to an additional SG$0.8 million, comprising cash of SG$0.6 million and equity of SG$0.2 million, on achievement of gross margins in future years."
So, MMA agrees to pay up to US$8 million in historic legal costs against a business that it only just bought, and then agrees to reward the sellers with yet more money if the project logistics team achieves certain "gross margins." Note that there is no mention of cash generation, profitability or repayment of the legacy legal costs, just a commitment to reward the 20 per cent shareholders in the project logistics business, whom we understand are the managers, with another SG$800,000 (US$588,626) if they achieve certain "gross margins".
As usual with MMA, every piece of good news is double-edged. The company's cash at bank increased by AU$16.4 million (US$12.05 million) or 23 per cent to AU$86.6 million (US$63.66 million). Unfortunately, trade payables, the amount that the company owes its suppliers, increased from AU$30.5 million (US$22.42 million) to AU$41.9 million (US$30.8 million) on June 30, 2020, so much of the increase in cash in MMA's bank account came simply by squeezing the company's suppliers and paying them later.
The company has announced it has opened talking with its financing banks over its AU$257 million (US$188.91 million) of borrowings. Another AU$7.5 million (US$5.51 million) of debt needs to be paid down by December 31, 2020, and the same amount by June 30, 2021, which should be achievable. What happens when the balance of the loan is due to be repaid in full on maturity at the end of September 2021 is unclear.
MMA reported that it paid an average interest rate on its bank loans of only 4.17 per cent at June 30, 2020, down from 5.99 per cent a year earlier. If the debt is renewed, expect this to increase sharply. The clock is ticking on whether MMA's banks will continue to support the business thirteen months from now.
Whilst the share price languishes at just over AU$0.04 (US$0.02), there was good news for the top management. A footnote on page 30 of the results announcement showed that "as at 30 June 2020, executives and employees held rights over 35,188,068 ordinary shares," an increase of more than twenty million shares over the year. Once again, David Dickson of McDermott proves an inspiration to so many in the industry (here).
James Fisher and Sons also reported its half year results in the last week of August. Fisher and MMA are growing increasingly comparable and are starting to compete head to head in subsea projects, and in Mozambique. Fisher already has a strong position in defence, and reported that it was awarded a three-year extension to its submarine rescue service for NATO.
Like MMA, Fisher is increasingly focused on renewables, and reported that its Scantech Offshore unit further increased its services to the renewables market, providing compressors for bubble curtains, which reduce subsea sound and pollution during construction and protects marine life, bubble curtains which MMA Valour recently deployed in Taiwan.
MMA has displayed remarkable candour in airing its many problems. Fisher, not so much, in my opinion. Like MMA, POSH, and the people of Yemen (here), Fisher has also had historic problems with Saudi Arabia (here). Now, in its annual results, the company was at pains to highlight its resilience in the face of Covid and low oil prices.
Fisher reported a statutory profit of £7 million (US$9.34 million) for the period, after impairments of £4.8 million (US$6.4 million) in the period and reported that, "all our divisions showed good resilience and traded profitably in each month during the second quarter." It reinstated its dividend.
Fisher boasted that it had increased its operating cash flow by £34.9 million (US$46.55 million) to £60.9 million (US$81.23 million); like MMA, much of this increase came from squeezing its suppliers, as Fisher's trade payables increased by £15 million (US$20 million). Another chunk came from deferring 20 per cent of the pay of over 800 of its staff, but the cash flow benefit of this move was not stated.
Whereas MMA kept its cash at the bank, Fisher used it to pay down £30 million (US$40 million) of debt, to leave it with £173 million (US$230.75 million) of long-term loans outstanding, almost exactly the same amount as MMA.
MMA's balance sheet suffered massive impairments to its vessel fleet (AU$57 million, as we discussed above). Fisher's balance sheet included US$70 million of investment in two dive support vessels (Subtech Paladin and Subtech Swordfish, apparently managed by Perth's Go Offshore here) at the end of 2019 (discussed here), but there is no sign of Fisher significantly impairing either of these assets. Why not? Virtually every offshore vessel owner has shown massive impairments to their fleet (including a US$600 million impairment at Swire Pacific Offshore, as we reported here) as the market plunges.
Somehow, Fisher believes its two dive support vessels have miraculously retained their value, despite a market, where the company saw, unsurprisingly, "a reduction of subsea oil and gas projects in the Middle East and West Africa."
Fisher's balance sheet is remarkably asset light, as we have highlighted before, with property, plant and material accounting for only £208 million (US$277.44 million), whilst goodwill and intangible assets account for £183 million (US$244 million). This goodwill is largely being the difference between the price paid for the company's many acquisitions and the book value of those assets in the accounts at the time they were bought.
No other marine company that I can think of has so much goodwill on its balance sheet. How much is it really worth?
As long as Fisher continues to generate prodigious quantities of cash, this will not be a problem, but the moment the cash generation stops, then the value of this goodwill will be called into question. So, Fisher has every incentive to keep acquiring. Since MMA is approximately the same size and is now heading on a parallel strategic trajectory to Fisher in subsea, renewables and defence, perhaps James Fisher and Sons might be the ideal buyer for MMA?
As Gore Vidal opined, "There is no human problem which could not be solved if people would simply do as I advise."
