Beneficiary Of Higher Activity In The Offshore Sector
The rationalised oil & gas offshore support industry has shown resilience during the
COVID-19 pandemic. Channel checks suggest vessel utilisation has been improving,
helped by minimal newbuilds and increased offshore activity in the region. MPM will
benefit from positive operating leverage from higher charter and utilisation rates and a
lean operating structure. Maintain BUY with a higher target price of S$0.043 (from
S$0.038), after rolling forward the valuation base year to FY23.
WHAT’S NEW
• Increased offshore activity driving charter rates. Increased activity in the oil & gas
industry has driven up vessel charter rates and utilisation, since the global economic
resumption following the end of COVID-19 pandemic lockdowns towards late 20. Bullish
expectations driven by elevated crude oil prices above US$100 have also resulted in oil
majors looking to increase production in the commodity. This translated to higher capex
towards reactivating offshore production platforms and further raised industry utilisation for
offshore supply vessels (OSV). Furthermore, the nascent offshore wind farm market in
Southeast Asia, particularly in Taiwan, has taken up supply of OSVs for vessel operators
repositioning towards the relatively longer term charter contracts.
• Minimal newbuilds on smaller-sized vessels provide support to dayrates. The lack of
investment in the offshore oil industry since 2014 is expected to lead to upward pressure on
utilisation and dayrates of support vessels going forward. Industry utilisation rates have
begun to rise since 2H21 from higher demand due to the confluence of factors listed above.
• Improving financials and diversification efforts pulling through. In 1HFY22, Marco Polo
Marine (MPM) reported a 47.8% yoy jump in core EBITDA to S$5.8m. The positive set of
financials came on the back of higher revenue of S$27.6m (+30.9% yoy), attributed to
increased fleet utilisation and charter rates, as well as a rise in repair projects under the ship
building & repair segment. Additionally, gross margin expanded to 29.6% (1HFY21: 23.8%)
from more activity at the shipyard. The shift away from supporting the oil & gas industry
towards the renewable energy segment has been successful for MPM. Currently, five out of
13 OSVs owned by MPM are chartered within the offshore wind farm projects in Taiwan.
STOCK IMPACT
• Operating expenses already lean, primed for positive operational leverage. The
restructuring efforts carried out in FY17 have resulted in improved profitability, with higher
gross margin and a reduction in administrative expenses. Going forward, we believe margins
should remain elevated due to improved sector dynamics after the 2014 oil crisis, as well as
management’s focus on increasing its share in the offshore windfarm market.
• Debt-free and assets marked at historical low. Closing in on the five-year mark since a
capital injection in FY17, MPM has shown excellent cash management amid the industry
consolidation, with its net cash as of end-1HFY22 standing at S$27.9m. Balance sheet is
clean and asset values are marked considerably low as the group undertook the massive
impairments during the corporate restructuring exercise during the bottom of the industry
downturn, which provides a comfortable level of support for our valuation.
• Growing recurring income from shipyard. Apart from the ship chartering revenue of
S$17.1m which constituted 62% of 1HFY22, MPM derived S$10.5m from the shipbuilding &
repairs segment at its shipyard in Batam, Indonesia. Prior to the tail-end of the 1HFY22
financial period, the shipyard completed the extension of its dry dock in Feb 22, which lifted
repair capacity by 20% to 450m across three dry docks. This is expected to continue driving
growth for the shipbulding & repairs segment, which is expected to see higher workload from
the shift in repairs from the Singapore yards. Revenue from the ship repair business is
relatively sticky, with most of its business coming from repeat customers.
EARNINGS REVISION/RISK
• No changes to our forecasts.
VALUATION/RECOMMENDATION
• Maintain BUY with target price raised to S$0.043 (from S$0.038). We have rolled forward
our valuation base year to FY23 and kept our peg at 1.1x P/B, or +2SD of its historical fiveyear average. This is supported by improving charter rates and better vessel utilisation. We
believe MPM’s already-impaired book value of S$0.03/share would provide a strong level of
support for the share price, and the anticipated improvement in financial numbers should lift
share price above its book value.
SHARE PRICE CATALYST
• Higher-than-expected ship charter rates and vessel utilisation.
• Increased activity at shipyard.
• Award of new ship chartering contracts.