Marco Polo Marine
Target Price: SGD0.61
Yard Visit: Preparing For An Upturn
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.
• 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.
Publish date: 25/09/13