Is MMA Offshore Ltd cheap at this share price?

Credit: mhobl

The MMA Offshore Ltd (ASX: MRM) share price has fallen 46% over the last month to trade at just 23.5 cents per share. That compares to a 1.2% decline for the broader S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

Is this an opportunity?

At its current share price, MMA Offshore looks like an incredible opportunity. The shares are trading on a trailing 23.4% fully franked dividend yield – grossed to 33.4% – while they’re also trading at a considerable discount to their net tangible asset value.

What that means is that the company’s market capitalisation (roughly $88 million) is significantly lower than the value of its real assets – most of which is in property plant and equipment. The 2015 Annual Report showed net assets of $779 million, implying an 88.7% discount.

Should you buy?

While the figures alone suggest that MMA Offshore is a screaming bargain, I wouldn’t be so sure. Oil prices are hovering near their lowest prices in years, and expected to fall even further, which is destroying the economic viability of various projects.

Even though the company has put a dollar value on its assets, it doesn’t mean anyone would be willing to buy them. If the company were to have a fire sale, its assets could be sold at a considerably lower price than they’re supposedly worth today. Indeed, MMA Offshore has already been forced to record a number of significant write-downs and more could soon be on the way if conditions don’t improve.

At the same time, earnings have also taken a huge hit, as have cash flows, which suggest the group’s monstrous dividend yield is also unsustainable.

The Verdict

On a historical basis, MMA Offshore shares are cheap but there’s nothing stopping them from falling even further. I wouldn’t be surprised to hear about new impairments in the future and I don’t believe a dividend in 2016 will be feasible either. Although it’s a ‘cheap’ stock, I’m certainly not a buyer today.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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