By VINCENT WEE
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TO THE casual investor, there may seem little connection between an El Nino-related prolonged dry season in Indonesia and the marine industry. But if one looks closely at specific segments, there may be interesting opportunities to be discovered.
For example, Marco Polo Marine, which bills itself as an integrated shipping group, is one company that could benefit significantly from this seasonal variation. The company specialises in the transportation of coal in Indonesia.
Indonesian coal mining is somewhat unique in that many mines are located far inland and the commodity needs to be transported by barges to deeper waters off the coast before it can be loaded onto the dry bulk carrier ships that take it to the export markets. This is where Marco Polo's forte lies.
It is one of the biggest players in the tug and barge market for the transportation of coal, sand and granite with a fleet of 55 vessels, which will increase to 80 vessels by year-end.
Demand for Indonesia's coal has remained relatively constant despite the economic slowdown, with the only impediment to export volumes being production capability. The dry season in the second half of the year enables coal mines to increase production and the longer the season, the better production will be.
As an indication, China last week said coal imports more than doubled year-on-year in the first half to nearly 50 million tonnes. This will benefit Marco Polo as demand for its services will also rise in line with increased production. By some estimates, Indonesian coal production is expected to achieve annual growth of 8.5 per cent till 2012. Marco Polo sees a gradual pick-up in coal exports of 10-15 per cent over the next six months.
In addition, Marco Polo is also active in the transport of sea sand and granite used in reclamation works. According to the company, demand for these services has more than doubled over the past year as Indonesia's ban on sand exports kicked in and contractors had to switch to other sources. With these new sources being further away in Vietnam, Myanmar and Cambodia, the voyage length increases, meaning that Marco Polo's vessels are used for longer periods.
Indeed, the charter revenue mix has become slightly biased towards the construction market, which now makes up about 60 per cent of revenue with coal transportation accounting for the remaining 40 per cent. This in turn could provide further positive surprises as the group's overall revenue mix itself has changed.
Following the completion of its first drydock in H1 FY09, the percentage of revenue from shipbuilding and repair increased to 55 per cent with chartering taking up the remaining 45 per cent - a reversal from the previous corresponding period. This is set to increase as the second drydock is completed in the second half.
Looking ahead, Marco Polo expects revenue from ship repairs, which are less cyclical in nature relative to that from shipbuilding, to contribute significantly to the shipyard operations while recurring income will be underpinned by sustainable time charter income and the underlying rates.
'With the addition of 25 new vessels and the two new drydocks for the ship repair business going operational by October and the sale of an AHTS vessel, Marco Polo's earnings are projected to accelerate in FY10 by 86 per cent and FY11 by 25 per cent,' said CIMB-GK Research as it initiated coverage with a 'buy' rating and a target price of 51 cents.
'The ship repair business will be Marco Polo's wild card that could spring positive surprises,' said CIMB-GK, adding that 'current valuations are attractive, given Marco Polo's growth potential'.
The stock was last traded at 37.5 cents.
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