Sunday, February 9, 2014

Otto Marine: Charting A Turnaround Course

Otto Marine: Charting A Turnaround Course
By Shane Goh and Elaine Lee

In a potential turnaround year, Otto Marine returned to the black for the first nine months of FY13 and witnessed a change at the helm as it gears up for a booming oil and gas sector in 2014. Shares Investment pays a visit to the firm’s premise for an exclusive interview with Otto Marine’s recently appointed chief executive officer, Garrick Stanley.

For the last two years, Otto Marine had sailed in a red sea, hampered by reduced utilisation and charter rates. Instead of lamenting about their plight, the firm took this opportunity to concentrate on completing the construction for large anchor handlers and deep sea rig ships in its yard.

Additionally, Otto Marine shed away its geophysical business segment as it sought to strengthen its balance sheet for future endeavours and refocused its strategy in line with its core business. Presently, Otto Marine possesses a shipyard in Batam, Indonesia that provides shipbuilding, fabrication and repair services as well as a ship management arm.

Diversified Business Model
In the aftermath of the subprime crisis, ship utilisation and charter rates have remained flat while requests for new ships nosedived as oil companies scaled back their ventures. “To combat the lacklustre demand in shipbuilding, Otto Marine’s strategy at that point was to manage its vessels with a strong partner who could equip us with the expertise in ship chartering,” commented Stanley. In February 2011, the firm acquired its target – Go Marine Group – an Australian ship management company with direct contracts with all the oil majors.

To avoid placing all their eggs in one basket, Otto Marine has spread out its revenue sources across various segments. “We have an extensive fleet operating worldwide with a wide range of clients having successfully completed over US$1 billion offshore support vessel and subsea services contracts in the last five years,” said Stanley.

Of the 63 ships at its disposal, 50 percent is firm-owned with the balance chartered or leased in. Stanley noted the distribution as a comfortable balance that provides flexibility to adapt to market conditions. “Our plan is to keep our fleet under 10 years of age. We look to constantly realising the equity on the vessels, building new ships and upgrading the technology and quality,” stressed Stanley.

Notably, ship chartering contributed 62.6 percent of Otto Marine’s turnover for 9M13. Back in FY10, the segment only made up 2.9 percent of the firm’s top line. “Despite deriving over half of our turnover from the ship chartering segment, the market still views us largely as a ship yard,” said Stanley. The key driver for the shift in revenue mix lies in the Go Marine acquisition.

Shift In Revenue Breakdown
Source: Company's Financial Statements

Business Outlook
Recent positive data released from the US has built the case for a US$10 billion reduction in its monthly bond repurchases. This has fuelled hopes for robust fuel and energy demand in the world’s biggest oil consumer. Expectation of an improving economy has spurred West Texas Intermediate (WTI) crude oil prices to around US$100 per barrel. The bullish momentum was further propelled by continued decline in US oil supply.

According to the Energy Information Administration (EIA), global oil demand is expected to grow by 1.2 million barrels per day in 2014. On the supply front, EIA expects world supply to increase by a similar figure this year. As WTI crude oil prices hover close to US$100 per barrel, oil exploration and production activities in places like Gulf of Mexico, Brazil, West and East Africa, and the North Sea, where the firm operates in, has picked up and will help to retain vessels that shift out of Asia.

Stanley believes this will lead to an increase in utilisation and day rates in conjunction with the 135 new jack-up rigs, which would require two to three vessels each, coming up in the next three years. “Today we are seeing utilisation increasing and the rates on the move upwards, if not slowly. The next five years will be strong,” said Stanley when asked about the outlook of charter rates for the industry.

When queried on the outlook of its shipyard, Stanley highlighted the restructuring exercise carried out to expand its shipbuilding, fabrication and repair capabilities as well as vessels demand for Indonesia’s cabotage market as catalysts for future upside. “With oil companies increasingly opting for younger vessels, the outlook on shipbuilding remains buoyant,” added Stanley.

Going forward, Otto Marine would focus on building high-end vessels for themselves, which will be used for chartering. “This is fundamental shift, while we will continue to build for third parties, the focus is now on ourselves,” Stanley said firmly.

Stanley pointed out the inherent volatility of the shipbuilding segment as the key factor behind Otto Marine’s decision to reduce its reliance on shipbuilding and increase its revenue derived from other avenues, “Nevertheless, ship repair will always be there as boats have to be docked every few years for maintenance,” reasoned Stanley.

Renewed Focus
For the first nine months of FY13, Otto Marine’s turnover grew 24.2 percent, from a year earlier, to US$350.4 million. The improved performance was attributable to the sale and delivery of vessels as well as increased repairs and fabrication work. This led to a reversal in gross profits of the shipbuilding segment, which returned to the black on back of a 13.2 percent in gross profit margin, compared to a negative 22.7 margin in 9M12.

Since hitting a year-low in August 2013, Otto Marine’s share price has risen more than 70 percent to close at $0.079 on 28 January 2014. Despite the strong run up, the firm’s shares are currently trading at 0.46 times price to sales. Stanley opines that investors have begun to see the potential of Otto Marine.

With a positive outlook on the oil and gas sector, utilisation and charter rates in the upcoming years, Otto Marine, now a full service provider, is poised to sail away from its ship yard status and penny stock image.

Publish date: 07/02/14

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