Marco Polo Marine - UOB Kay Hian 2022-12-07: Reeling In Revenue With Higher Shipping Rates & Expansion Efforts

• MarcoPolo Marine (SGX:5LY)’s business has stayed resilient amid the uncertain macro environment, due to better-than-expected fleet charter and utilisation rates, as well as its acquisitions during the year.
• Vessel utilisation has been improving, helped by minimal newbuilds and increased demand in Asia. Together with its strong balance sheet and expansion efforts in the offshore windfarm sector, MarcoPolo Marine will likely reap greater benefits in the long term.

Strong demand from both oil & gas and offshore windfarm sectors drive charter rates.

• Since the end of the COVID-19 pandemic, vessel charter and utilisation rates for tugboats, barges and offshore support vessels (OSV) have been on the rise. Additionally, the ongoing geopolitical tensions continue to drive oil prices up to their strongest levels in almost eight years. The elevated crude oil prices of above US$100 during the year have led to oil majors looking to increase production in the commodity. This resulted in higher capex towards reactivating offshore production platforms and further raised industry utilisation positively for OSV.
• On top of this, MarcoPolo Marine was awarded more contracts in the shipyard business and higher-value repair projects during the year, as observed in the segmental revenue’s 59.2% y-o-y increase from S$26.0m in FY21 to S$41.4m in FY22.

Minimal newbuilds on smaller-sized vessels provide support on 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, in line with industry expert Clarksons’ expectations for 2022.

Diversification efforts bear fruit for ship chartering business.

• In 2HFY22, MarcoPolo Marine reported a 196% y-o-y jump in core EBITDA to S$18.1m. This is mainly driven by the rise in revenue in the ship chartering operations segment, from S$10.7m to S$34.3m (+219.6% y-o-y) in the same period.
• MarcoPolo Marine’s path of expansion into the booming offshore windfarm sector constitutes the group’s joint venture with Oceanic Crown Offshore Marine Services Ltd. and the acquisition of PKR Offshore Co. Ltd. in May 22 thus far. This has helped establish its market presence in Taiwan and greatly contributed to the improved financial performance, with about 40% or 5 of the group’s 13 OSVs chartered out for the market.

Management continues to expand in offshore windfarm sector.

• In Sep 22, MarcoPolo Marine announced its plans to build, own and operate a new Commissioning Service Operation Vessel (CSOV) as a shortage in such vessels in the market is observed. Demand for CSOVs is on the rise, with increased construction of new projects and projects near the final commissioning date. The CSOV is expected to be completed in 1QFY24, with the management hoping to meet the increasing demand for support vessels required to service Asia’s offshore windfarm industry.
• MarcoPolo Marine also signed a MoU with “K” Line Wind Service, Ltd., an offshore support vessel services provider in Japan in Dec 22, successfully extending its reach to the Japan market. According to the Global Wind Energy Council’s Global Wind Report 2022, the annual global offshore market is expected to grow from 21.1GW in 2021 to 31.4GW in 2026 (+49%), demonstrating the market’s strong growth potential in the long term.
• Additionally, MarcoPolo Marine recently expanded its dry-docking capacity, with the completion of the dock 1 extension program in 2HFY22. This will likely improve its revenue moving forward.

Clean from debt and balance sheet impaired.

• MarcoPolo Marine has shown excellent cash management, with a strong cash position of S$53.5m as at end-FY22. This provides a comfortable level of support for our valuation.

MarcoPolo Marine – Earnings forecast revision & recommendation

• We have raised our FY23-24 revenue forecasts for MarcoPolo Marine by 50-62%, on higher margin assumptions and improving charter rates. Accordingly, our net profit estimates have increased 125% and 141% to S$15.2m and S$17.0m for FY23 and FY24 respectively, while adding our FY25 forecasts.
• Downgrade MarcoPolo Marine to HOLD with a higher target price of S$0.048 (S$0.038 previously). We value MarcoPolo Marine at 1.1x FY23F P/B, in line to +2 standard deviation of its historical 5-year average on the back of:
  1. improving charter rates,
  2. better vessel utilisation rate, and
  3. expanded shipyard capacity.
• Catalysts:
  • Higher-than-expected ship charter rates and vessel utilisation.
  • Award of new ship chartering contracts.
  • Higher value of repair projects during the year.