Marco Polo Marine - Buy by DMG (14 Jan 2010)

Initiating with BUY; Target price at S$0.745. With the completion of its Batam shipyard facilities, Marco Polo Marine (MPM) is set to receive a massive kicker to its earnings. Its shipyard facilities, which occupy ~34ha land with a seafront of ~650m, will boost MPM’s shipyard business with the additional shipbuilding and ship repair capacity. In addition, MPM also intends to increase its chartering fleet size beyond 80 tugs and barges as of end 2009 (46 wholly owned, 24 JV owned). We expect the demand for MPM’s tugs and barges to remain strong with >90% utilisation, driven mainly by the implementation of Indonesia’s Cabotage rule effective from 1 Jan 2010 and increasing demand for coal in Indonesia. Furthermore, MPM is ready to capture a slice of action in the Indonesian offshore oil and gas sector through chartering 5-8k bhp AHTS via JV companies with experienced players such as PT Rig Tenders, a subsidiary of the Malaysia-based Scomi. Initiate with BUY and TP of S$0.745.

Beneficiary of Indonesia’s Cabotage rule. With effect from 1 Jan 10, the shipments of specified commodities, which include coal and oil, within the Indonesian waters can only be conducted by Indonesia flagged vessels. Foreign operators may continue to operate on Indonesia’s domestic waters provided if it utilises >5k GT of Indonesia flagged vessel manned by Indonesian crews. This regulation will benefit companies with Indonesian links, such as MPM whose controlling shareholder own Indonesia-based BRJ, one of the largest granite aggregator exporters to Singapore.

Additional shipyard capacity ready to contribute. From FY10 onwards, MPM will be able to harness its new shipyard capacity in Batam. The shipyard facilities are now able to handle up to eight vessels of 150m in length for ship building and up to five vessels of length between 50m and 130m for ship repair at any one point of time. Given Batam’s proximity to Singapore, MPM is well-poised to gain a steady stream of income from its ship repair business.

Low base, high growth justifies premium. We arrived at a TP of S$0.745 based on peers’ average P/E to growth of 0.73x FY10 and estimated growth rate of 15% for MPM. At this TP, MPM will be trading at of 11.0x FY10 earnings vs peers’ average of 11.2x.