Buy (Maintained) Yard Visit: Preparing For An Upturn. Energy - Oil & Gas Target Price: SGD0.61 Market Cap: USD102m Price: SGD0.38

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1 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Vol m Company Update, Marco Polo Marine (MPM SP) Buy (Maintained) Energy - Oil & Gas Target Price: SGD0.61 Market Cap: USD102m Price: SGD0.38 Yard Visit: Preparing For An Upturn Macro Risks Growth Value Marco Polo Marine (MPM SP) Price Close Relative to Straits Times Index (RHS) Last week, we brought a group of investors to MPM s Batam yard. We saw all three drydocks busy with repair operations, and the construction of a third-party 8,000bhp AHTS vessel and two similar vessels for its own fleet. In preparation for better shipbuilding times, a new slipway is almost complete. Investors were most interested in the company s 20% net margins. We maintain our BUY call, SGD0.61 TP Source: Bloomberg Avg Turnover (SGD/USD) m/0.09m Cons. Upside (%) 60.5 Upside (%) wk Price low/high (SGD) Free float (%) 40 Shareholders (%) Nautical International 59.7 Shariah compliant Lee Yue Jer yuejer.lee@sg.oskgroup.com Jason Saw jason.saw@sg.oskgroup.com Pictures galore! In the next pages, we present pictures of MPM s workshops, drydocks, a new slipway, and vessels under construction. In short, this is a yard still busy enough to employ 1,000 workers today. Yard improvements in cyclical trough. The optimal shipyard strategy is to utilise available space for shipbuilding during times of boom, and make facilities improvements during downturns. We see this strategy being executed with a new slipway almost complete. The recent upturn in commercial shipbuilding is relieving the pressure on offshore asset prices, which should induce a recovery in offshore building prospects. Charter contract catalysts visible. MPM and associate PT BBR are on the cusp of renewing their AHTS charters, with current contracts expiring in September to November. With AHTS supply still trailing far demand in Indonesia, we are highly confident that each vessel will be re-chartered immediately at prevailing market rates, which are 33% higher. Investors focus on MPM s 20% net margins. The most common questions for management centered on MPM s very high margins and their sustainability. Management said its AHTS charter margins are easily 40%, supporting the findings in our 21 June report, Taking Another Bite Out of The Indonesian Pie. With future growth coming from more AHTS vessels joining the fleet and being re-chartered at higher rates, MPM is likely to maintain its high margins. No reason for high-return asset-driven company to trade well below book value. MPM is trading at 0.8x P/BV, clearly undervaluing its 15% ROE. FY14F P/E is a mere 5x. We believe that MPM s quality assets are worth much more, and maintain our BUY call and SGD0.61 TP. Forecasts and Valuations Sep-11 Sep-12 Sep-13F Sep-14F Sep-15F Total turnover (SGDm) Reported net profit (SGDm) Recurring net profit (SGDm) Recurring net profit growth (%) (26.8) Core EPS (SGD) DPS (SGD) Dividend Yield (%) Core P/E (x) Return on average equity (%) P/B (x) P/CF (x) na EV/EBITDA (x) Net debt to equity (%) Our vs consensus EPS (%) See important disclosures at the end of this report Powered by EFA TM Platform 1

2 Additional Notes Below is a picture of MPM s three drydocks. The smallest Drydock #1 is at the far right, Drydock #2 is in the middle directly in front of two visible workshops, and the newest and largest Drydock #3 is in front of the covered stores. Figure 1: Aerial view of MPM s yard Source: CompanyOSK-DMG estimates Our first view of the yard on exiting the small red-roofed office block was the ship plate workshop, through which we could see a vessel sitting in Drydock #2 (Figure 2). Looping right around to Drydock #1, we saw Falcon Energy s supply vessel FEG Merlin sitting in the dock undergoing maintenance (Figure 3). Figure 2: Ship plate workshop, with Drydock #2 in the background Figure 3: Drydock #1 filled by Falcon s supply vessel A closer look at Drydock #2 revealed that the blue-hulled vessel was the venerable Bold Endurance, a massive 458-foot heavy-lift vessel built in 1979, now converted to a cable-lay vessel (Figure 4). With most of the maintenance work complete, she now looks like a brand-new vessel. In Drydock #3 was the Duta-7, an accommodation barge (Figure 5). Drydock #3 was built especially wide in order to cater to the increasing number of large accommodation vessels operating in this region, and in this case it was performing its purpose-built role. See important disclosures at the end of this report 2

3 Figure 4: 34-year-old grand dame looking brand-new Figure 5: Duta-7 in purpose-built dock Moving further along the waterfront beyond the drydocks, we saw a new slipway whose construction is almost complete (Figure 6). In this picture, the slipway is barely visible between the blue bollard and the PT Marcopolo Shipyard Slipway sign, being dominated by the third-party newbuild 8,000bhp anchor handling tug supply (AHTS) vessels in the background (in the aerial view file photo in Figure 1, we are now standing near the red-hulled AHTS vessel on the upper left corner.) There are four more workshops not visible in the aerial view a maintenance shop, a piping shop, and two hull-section fabrication shops whose entrances open to the new slipway and to the open ground where the newbuild 8,000bhp AHTS is located. We see clearly a well-designed production-line organisation where the extremely heavy hull sections are fabricated in the shortest possible transport distance to the assembly area. Figure 6: New slipway and newbuild 8,000bhp AHTS Figure 7: Bow sections of two 8,000bhp AHTS vessels The bow sections in Figure 7 are for MPM s newbuild AHTS vessels, which we expect will join its Indonesian and Singapore fleet in 2014, further boosting its highmargin charter income. See important disclosures at the end of this report 3

4 We also saw a number of vessels on the waterfront to MPM s yard. The stern of MMS Pahlawan, a Malaysian-flagged 5,280bhp AHTS vessel, was tied near Drydock #1, probably awaiting maintenance (Figure 8). Moored near the new slipway, the one-year-old pipe-carrier Crest Angelica and the newly-built MP Prevail were looking magnificent (Figure 9). MP Prevail is MPM s latest acquisition, a 9,000bhp AHTS vessel ready to go on charter in Indonesia. Figure 8: The 30-year old MMS Pahlawan Figure 9: Crest Angelica and MP Prevail All said, we saw a well-organised yard still operating profitably even though shipbuilding demand is at a cyclical trough. With ample capacity, MPM is ready to accept new orders. Despite the downturn, MPM s yard had set a number of new milestones: i) the construction of a drilling barge, ii) construction of two 8,000bhp AHTS vessels with bollard pulls 9% and 17% above the industry average, and iii) complete outfitting of an extremely high-specification DP-3 construction vessel (one of less than a dozen in the world!). As a group, we expect MPM to continue to post healthy profits. We expect ROE to be maintained at 15% over the next three years, with core profits accelerating to 40% in FY14F from the current year s 8% cyclical-trough growth. This acceleration will come on the back of: i) higher re-charter rates, and ii) new AHTS vessels joining the fleet, with potential newbuilding contracts providing upside to our estimates. See important disclosures at the end of this report 4

5 Financial Exhibits Profit & Loss (SGDm) Sep-11 Sep-12 Sep-13F Sep-14F Sep-15F Total turnover Cost of sales (60) (61) (57) (71) (81) Gross profit Gen & admin expenses (8) (7) (9) (9) (9) Other operating costs (6) (5) (4) (4) (4) Operating profit Operating EBITDA Depreciation of fixed assets (7) (7) (16) (19) (22) Operating EBIT Net income from investments Other recurring income 2 (1) Interest expense (3) (1) (5) (6) (6) Exceptional income - net Other non-recurring income Pre-tax profit Taxation (3) (4) (2) (4) (5) Minority interests - - (4) (7) (11) Profit after tax & minorities Reported net profit Recurring net profit Cash flow (SGDm) Sep-11 Sep-12 Sep-13F Sep-14F Sep-15F Operating profit Depreciation & amortisation Change in working capital (27) 8 (4) (6) (4) Other operating cash flow Operating cash flow (9) Interest paid (0) (0) (5) (6) (6) Tax paid (1) (1) (2) (4) (5) Cash flow from operations (10) Capex 16 (12) (41) (69) (49) Other investing cash flow (11) (24) Cash flow from investing activities 5 (36) (32) (69) (49) Dividends paid - (3) (3) (3) (3) Proceeds from issue of shares Increase in debt Other financing cash flow (3) (1) Cash flow from financing activities Cash at beginning of period Total cash generated (1) 12 Forex effects (0) (1) Implied cash at end of period See important disclosures at the end of this report 5

6 Financial Exhibits Balance Sheet (SGDm) Sep-11 Sep-12 Sep-13F Sep-14F Sep-15F Total cash and equivalents Inventories Accounts receivable Other current assets Total current assets Total investments Tangible fixed assets Total non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Total long-term debt Other liabilities Total non-current liabilities Total liabilities Share capital Retained earnings reserve Shareholders' equity Minority interests Total equity Total liabilities & equity Key Ratios (SGD) Sep-11 Sep-12 Sep-13F Sep-14F Sep-15F Revenue growth (%) Operating profit growth (%) (6.1) Net profit growth (%) (9.5) EPS growth (%) (18.5) Bv per share growth (%) Operating margin (%) Net profit margin (%) Return on average assets (%) Return on average equity (%) Net debt to equity (%) DPS Recurrent cash flow per share (0.03) See important disclosures at the end of this report 6

7 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Marco Polo Marine (MPM SP) SWOT Analysis One of the largest offshore support vessel (OSV) operators in Indonesia Shipyard has a track record of outfitting even DP-3 vessels that are usually reserved for larger yards Strong cost controls and well-selected niches offer growth prospects for high-margin businesses Potential new entrants into the Indonesian OSV space The implementation of cabotage law has forced out OSV supply in Indonesia, causing rates to surge by 30% An upswing in OSV demand due to high drilling rig orders over the last few years Long lag time to build a vessel difficult to capitalise on charter rate increases immediately Tug & barge operations are exposed to vagaries of weather conditions P/E (x) vs EPS growth P/BV (x) vs ROAE % % % % % 14% 5% -4% -13% % 14.3% 10.7% 7.1% % % % % P/E (x) (lhs) EPS growth (rhs) P/B (x) (lhs) Return on average equity (rhs) Company Profile Marco Polo Marine (MPM) is an Indonesian oil & gas and logistics play which operates a shipyard in Batam that builds OSVs and barges with three drydocks for repairs/conversion. It also operates a fleet of tugs, barges, OSVs and marine bunker vessels. Its associate, PT Bina Buana Raya, is listed on the Jakarta Stock Exchange. See important disclosures at the end of this report 7

8 0.61 NR Marco Polo Marine (MPM SP) Recommendation Chart Recommendations & Target Price Price Close 0.10 Sep-08 Jan-10 Apr-11 Jul-12 Buy Neutral Sell Trading Buy Take Profit Not Rated, Bloomberg Date Recommendation Target Price Price Buy Buy Buy Buy Buy Source : OSK-DMG estimates, Bloomberg See important disclosures at the end of this report 8

9 RHB Guide to Investment Ratings DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage DISCLAIMERS This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities. DMG & Partners Research Pte Ltd is a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as RHBIB which in turn is a whollyowned subsidiary of RHB Capital Berhad) and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in the securities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporations whose securities are covered in the report. This report is therefore classified as a non-independent report. As of 22 September 2013, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do not have proprietary positions in the subject companies, except for: a) - As of 22 September 2013, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for: a) - DMG & Partners Research Pte. Ltd. (Reg. No N) Kuala Lumpur Hong Kong Singapore Malaysia Research Office RHB Research Institute Sdn Bhd Level 11, Tower One, RHB Centre Jalan Tun Razak Kuala Lumpur Malaysia Tel : +(60) Fax : +(60) RHB OSK Securities Hong Kong Ltd. (formerly known as OSK Securities Hong Kong Ltd.) 12th Floor World-Wide House 19 Des Voeux Road Central, Hong Kong Tel : +(852) Fax : +(852) DMG & Partners Securities Pte. Ltd. 10 Collyer Quay #09-08 Ocean Financial Centre Singapore Tel : +(65) Fax : +(65) Jakarta Shanghai Phnom Penh PT RHB OSK Securities Indonesia (formerly known as PT OSK Nusadana Securities Indonesia) Plaza CIMB Niaga 14th Floor Jl. Jend. Sudirman Kav.25 Jakarta Selatan 12920, Indonesia Tel : +(6221) Fax : +(6221) RHB OSK (China) Investment Advisory Co. Ltd. (formerly known as OSK (China) Investment Advisory Co. Ltd.) Suite 4005, CITIC Square 1168 Nanjing West Road Shanghai China Tel : +(8621) Fax : +(8621) Bangkok RHB OSK Indochina Securities Limited (formerly known as OSK Indochina Securities Limited) No. 1-3, Street 271 Sangkat Toeuk Thla, Khan Sen Sok Phnom Penh Cambodia Tel: +(855) Fax: +(855) RHB OSK Securities (Thailand) PCL (formerly known as OSK Securities (Thailand) PCL) 10th Floor, Sathorn Square Office Tower 98, North Sathorn Road,Silom Bangrak, Bangkok Thailand Tel: +(66) Fax : +(66)