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Saturday, February 23, 2013

Marco Polo Marine: Generating Growth Through Offshore Oil & Gas Exposure And Publicly-Listed Indonesian Subsidiary

Source: http://www.sharesinv.com/articles/2013/02/22/marco-polo-marine-generating-growth-through-offshore-oil-gas-exposure-and-publicly-listed-indonesian-subsidiary/


With the advancing growth in Asia, the marine industry, in particular the offshore oil and gas sector, continues to thrive amidst buoyant demand for energy. Shares Investment was privileged to meet Mr Sean Lee Yun Feng, Chief Executive Officer of Marco Polo Marine Limited in an exclusive interview as the Group, together with its recently-listed Indonesian subsidiary PT Pelayaran Nasional Bina Buana Raya Tbk, gears up to tap on the rising offshore marine market in Asia.

Having reported eight consecutive years of record high revenue, Marco Polo Marine (MPM) turned in yet another set of sterling results for its full year ended 30 September 2012 with an all-time high net profit of $21.3 million. Continuing the growth momentum into the first quarter of financial year 2013, MPM posted a 3.2 percent rise in net profit compared to the same period last year despite a decline in revenue, boosted by an impressive gross profit margin of 38.6 percent.
Reflecting the strong performance, shares of MPM have been climbing higher and is hovering around its 52-week high of $0.44, or up 10.4 percent since the start of this year as of 20 February. With its achievements, it is hard not to take a closer look at the success story of this integrated regional marine logistic company which has steadily grown over the years.
Backed by a decade-long experience in the shipping industry, MPM’s sound execution of business strategies is perhaps one of the key reasons for its success. In 2010, the Group made its foray into the robust offshore oil and gas sector and is now operating a fleet of seven offshore supply vessels (OSVs). More recently, it listed its 49 percent-owned Indonesian subsidiary, PT Pelayaran Nasional Bina Buana Raya Tbk (BBR) on the Indonesia Stock Exchange in January 2013 to tap on the Indonesian offshore oil and gas market characterised by huge demand and a supply shortfall.
Riding The Robust Indonesian Offshore Market 
According to World Bank, Indonesia’s economy is expected to grow 6.3 percent in 2013. Demand is expected to be rising fast given the nation’s consumption of 1.4 million barrels of oil per day, which is projected to grow further as its economy develops, far outstrips its current production of about 940,000 barrels of oil per day.
“We have to bear in mind that it is not the case where there is limited oil and gas in Indonesia but rather, most of the production is currently done onshore. There has been under-investment in the offshore sector and now this segment is playing catch-up. In fact, we view the offshore oil and gas sector in Indonesia to be only at its nascent stage of development.
“As demand continues to grow, the industry can also be expected to move towards more complicated offshore exploration activities and to deeper eastern waters. This implies that there will be a sustained demand for rigs and as a result, more OSVs, indicating strong growth potential for our ship chartering business in the Indonesian offshore market over the mid to long term,” Mr Lee anticipates.
“However, the supply of OSVs in the Indonesian market has been limited due to the Cabotage rules which are stringently enforced. Currently, the Indonesian authorities allow only Indonesian-flagged vessels to operate in Indonesian waters. Among other regulations required of the company such as having to own a 5,000 ton gross registered tonnage vessel within its fleet, for vessels to be Indonesian-flagged, it has to be majority owned, i.e. 51 percent, by Indonesians. This thus creates a high entry barrier for foreign OSV operators,” he added.
Mr Lee elaborates that based on estimates, there are currently only around 20 anchor handling tug supply (AHTS) vessels of more than 5,000 brake horsepower (BHP) operating in Indonesian waters, but the shortage is especially acute at the 8,000 BHP and above level as there are perhaps only five such AHTS vessels which are Indonesian-flagged.
BBR In A Strategic Position
The timely listing of MPM’s BBR is a significant development that allows BBR to benefit from the favourable demand-supply dynamics for vessel owners in Indonesia. Mr Lee opined, “BBR’s listing not only achieves objectives such as fund raising and opening up additional funding channels for expansion, lowering of debt and raising our international profile, but most importantly, BBR would be the platform for MPM to expand its presence in the robust Indonesian offshore market.”
Notably, DMG & Partners pointed out that this massive shortage has resulted in a 15 to 20 percent AHTS charter rate premium in Indonesia compared to international market rates, and would likely benefit MPM as a promising source of high-margin growth.
Through the BBR platform, MPM is certainly in an advantageous position to tap the rising demand and meet the shortfalls in the Indonesian market, especially when BBR currently already owns two of the 8,000 BHP and above AHTS vessels which are less than two years old.
Distinguished Resilience: Setting Itself Apart
Directing the attention to the Shipyard Division, Mr Lee mentions that while there are challenges in the ship building segment especially in the light of strong cost competition from China, MPM’s shipyard remains busy. This is because the shipyard continues to build to fulfil its internal demand, especially for OSVs, by riding on the strong demand from Indonesia and the expansion plans of both MPM and BBR.
In addition, the Group’s focus on more sophisticated ship repair, upgrading and outfitting projects has borne fruits especially with the completion of MPM’s third and its largest dry dock to date of length 190 metres in January 2012 in Batam. It has allowed the Group to move up the value chain with enhanced scale and technical capabilities. Mr Lee emphasised that focusing on sophisticated customisations give the Group an edge in terms of profit margins as many China firms focus more on revenue generation and standardisation of designs.
Mr Lee highlighted, “About 90 percent of our ship repair, outfitting and maintenance works are performed for third parties. We see a very sustainable business for ship repairs in the longer term given the strategic location of the shipyard at Batam, which is less than an hour from Singapore, where hundreds of vessels pass through every day. As such repair and maintenance works are knowledge intensive as well as time and location sensitive, the Group can command better margins being shielded from low-cost competitors. Targeting medium-sized vessels have also helped us to differentiate itself from bigger players in the market. All the above factors have provided support to MPM’s financial performance despite the lull in shipbuilding.”
It is, hence, no wonder that MPM enjoyed a high utilisation rate of 90 percent in FY12 and has been able to maintain an average of around 80 percent utilisation for its dry dock, given its long standing relationships with its repeat clients that are estimated to form 60 to 70 percent of its top line.
Steering Forward
On future plans, Mr Lee remains upbeat on the ship repair segment in its Shipyard Division as well the offshore oil and gas segment with respect to Ship Chartering Division, both being the company’s profit and margin growth drivers.
“We also plan on expanding our footprint in the Asia and Australasia region such as Malaysia, Thailand, Vietnam etc with a focus on the offshore segment,” he shared. Indonesia, in particular, would provide an avenue for strong growth. The Group will be working on expansion plans through investing in more OSVs with a view to shorten the time to market and fulfil the demand for OSVs as well as continually refine and upgrade its services rendered.
Both OCBC Research and DMG & Partners have rated “Buy” on MPM with a target price of $0.56 and $0.61 respectively on its promising prospects in Indonesia. It seems that with its strong footing in the Indonesian offshore market and the positive outlook from its ship repair segment, we can expect more upside potential from MPM as it steers forward.

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