Marco Polo Marine likely to maintain high margins

Driven by AHTS vessels segment.

OSK-DMG said it was convinced that Marco Polo Marine will likely maintain its current high margins, which is ranging at 20% because of more AHTS vessels joining the fleet and being rec-chartered at higher rates.

Here's more from OSK-DMG:

Yard improvements in cyclical trough. The optimal shipyard strategy is to utilise available space for shipbuilding during times of boom, and make facilities improvements during downturns. We see this strategy being executed with a new slipway almost complete. The recent upturn in commercial shipbuilding is relieving the pressure on offshore asset prices, which should induce a recovery in offshore building prospects.

Charter contract catalysts visible. MPM and associate PT BBR are on the cusp of renewing their AHTS charters, with current contracts expiring in September to November. With AHTS supply still trailing far demand in Indonesia, we are highly confident that each vessel will be re-chartered immediately at prevailing market rates, which are 33% higher.

Investors focus on MPM’s 20% net margins. The most common questions for management centered on MPM’s very high margins and their sustainability. Management said its AHTS charter margins are “easily 40%”, supporting the findings in our 21 June report, Taking Another Bite Out of The Indonesian Pie. With future growth coming from more AHTS vessels joining the fleet and being re-chartered at higher rates, MPM is likely to maintain its high margins.

No reason for high-return asset-driven company to trade well below book value. MPM is trading at 0.8x P/BV, clearly undervaluing its 15% ROE. FY14F P/E is a mere 5x. We believe that MPM’s quality assets are worth much more, and maintain our BUY call and SGD0.61 TP.