Marco Polo Marine Ltd - More yet to come (AmFraser)

LAST CLOSE: S$0.380

BUY

FAIR VALUE: S$0.505

Previous FV: S$0.505

Strong order flow, financial position stronger than market expects, expect new OSVs to be bought soon and add to FY12 profits.

New contracts: MPM yesterday announced that it has secured a ship upgrading project worth S$8.5m. We expect this contract to be performed and completed in FY12.

In the month of September alone, in addition to this ship upgrade contract, MPM has also secured a S$10.5m contract to build five 300-foot barges and a S$3.4m contract to build 8 offshore barges.

Leverage is already lower than market thinks: Even though on paper MPM’s 3Q2011 net gearing appears to be 49.6% (which for a shipping company is not high anyway), a closer look into the accounts informs us that its net gearing is actually far lower.

As explained in our last update “Strong profits yet trading below book value”, MPM’s in this year sold two 8,000bhp AHTS vessels and reflagged many of its tugs and barges to its associated company PT BBR. This has increased the Other Current Assets account to $79m from $3m at the start of the year.

Upon delivery of these vessels to PT BBR, these receivables and the debt attributable to each vessel will be taken off MPM’s books. We expect a significant portion of these to happen by 4Q2011, such that net gearing should fall to about 24% (depending on other sources/uses of cash, but debt overall should fall to about S$50m), or generally below FY2010 levels.

TDR will raise S$10m: The company’s portion of the TDR will be 25m new shares, which at current prices will raise about S$10m. The influx of this S$10m will immediately reduce net gearing by a further 9.2% to the 15% region. Since the balance sheet is already deleveraging via the asset sales, we expect this S$10m not to be used to pay off borrowings but to purchase new OSVs.

Low leverage plus incoming cash, hence expect vessel purchases soon: With cash coming in from two sources (recent vessel sales and TDR proceeds) and a sharply deleveraging balance sheet, MPM will be in a very good position to execute the strategy as we have described in our initiation report “Agile strategist in changing environment”.

Currently, OSVs offer the highest margins among its segments of shipbuilding, ship repairs, tugs and barges, and OSVs. Vessel prices worldwide are still low due to macroeconomic worries, and our understanding of management strategy and their previous actions lead us to believe that there will be further OSV purchases soon. These OSVs will likely already have charters, which would allow them to immediately contribute to MPM’s net profits upon purchase.

Watch this company, more yet to come: Given the following factors: i) Natural deleveraging; ii) Cash inflows; iii) Cheap assets worldwide; iv) Strong shipbuilding operations; iv) High oil prices sustaining global exploration & production activities in offshore oil and gas, we remain positive on MPM’s prospects. Its third drydock should also be coming online soon.

In recent weeks, MPM’s share price has jumped from $0.33 to $0.40, outperforming the general market which has remained stubbornly down. Even at today’s $0.38, we see potential for upward revisions if MPM continues to win new building/repair/conversions/upgrading projects for its shipyard, and upon announcement of new OSVs that immediately raise the bottom line. For these reasons, we retain our BUY call and FV of $0.505.