Marco Polo Marine

DMG & Partners Research on 21 Feb 2013

CHAIRMAN Lee Wan Tang has raised stake to 59.52 per cent at the highest price in three years. With the one million additional shares purchased at $0.42 on Wednesday, Mr Lee now owns 202.8 million shares in Marco Polo Marine (MPM) or 59.52 per cent. The critical point is the purchase price - this is the highest that he has been willing to pay in the last three years. Prior purchases were made between $0.33 and $0.35, with the exception being the $0.395 purchase around the IPO period of its Indonesian associate PT BBR.

Indonesia's recently enforced cabotage law has forced out 20 per cent of the modern AHTS supply. The cabotage law was enforced for AHTS vessels after Dec 31, 2012. This has caused foreign operators to see their contracts cancelled and the vessels sent out of Indonesian waters. Our industry sources inform us that there are only about 30 modern AHTS vessels between 5,000bhp and 8,000bhp in size in the whole country. Of these 30, we are aware of at least six which have been forced out of the country.

MPM is the prime beneficiary of the cabotage law. With the supply suddenly shrunk by 20 per cent, charter rates have spiked about 20 per cent higher than regional rates. MPM's four AHTS vessels in Indonesia are now reaping the benefits of high charter rates, high margins, and high utilisation rates.

Top in class in terms of technical capabilities, MPM's AHTS vessels have sustained bollard pulls averaging 15 per cent above the norm. This ensures that their vessels are always preferred, ahead of others when competing for charters. Their shipyard also recently outfitted a DP-3 vessel, which is an impressive achievement for a small shipyard. We count fewer than a dozen shipyards in Singapore which can outfit DP-3 vessels.

Maintain conviction "buy", it's likely to double in 2-3 years. We value MPM at nine times FY2013 EPS estimate, yielding a target price of $0.61 which is 43.5 per cent above Wednesday's close. Looking further ahead, the earnings forecast of $30.3 million translates into an EPS of 8.91 cents, which at the same nine times multiple would yield a target price of $0.80.

The stock is currently trading at extremely attractive levels - 6.2 times FY2013 EPS estimate and one time P/B. Peers in the oil & gas industry are trading at eight times to 20 times PE. At the very least, we expect the stock to revert to book value every year, which at 15 per cent ROE implies at least a decent 15 per cent return annually.

BUY