Downgrade to HOLD
Previous Rating: BUY
Current Price: S$0.40
Fair Value: S$0.43
Progress in the Offshore division on track. Marco Polo Marine's (MPM) offshore division was established at the end of last year, and the group has expanded its fleet to five offshore support vessels (OSVs) currently - two 5,000BHP AHTS vessels are under bareboat charters in Australia, one utility vessel is in the Gulf of Thailand, while two additional newbuilds were delivered recently and are currently undergoing a reflagging exercise. The newbuilds are 8,080BHP AHTS vessels bound for Indonesia.
Capitalising on healthy market demand. According to talks with industry players, demand for 5,000BHP and 8,000BHP AHTS vessels remain strong in SE Asia, such as Malaysia and Indonesia. MPM's vessels are currently of that size to cater to market demand, and with an expected increase in the exploration and development of oil and gas fields in Australia, Malaysia and Indonesia, the outlook for the group's offshore division looks bright. In Malaysia, the government's intention to boost oil production domestically has increased interest from both foreign oil companies and associated services companies. National oil company Petronas also announced that it is scaling back international exploration campaigns to develop its domestic oil and gas resources. Indonesia's Energy and Mineral Resources Ministry is also preparing a new regulation to boost exploration activities in the country, and it may contain clauses on incentives for contractors who successfully fulfilled their exploration commitments, as well as disincentives for those failing to meet their commitments, according to The Jakarta Post.
Shipbuilding orders mainly relate to tugs and barges. MPM announced about S$18m worth of new contracts since Jul this year, compared to around S$17.2m in the Jul to Oct period last year. However, the orders still mainly relate to tugs and barges, rather than OSVs such as AHTS vessels.
Downgrade to HOLD. Though MPM's revenue is expected to increase with its fleet expansion and greater ship repair activity, we prefer to be conservative in our estimates due to continued vessel reflagging activity (which affects fleet utilisation), and a more competitive ship repair environment. Furthermore, MPM's stock price has risen 20% in the last nine trading days such that the current price now has less than 10% upside compared to our fair value estimate of S$0.43 (based on 9x FY12F earnings). As such, we downgrade the stock to HOLD on valuation grounds.
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