• Reiterate BUY and SGD0.06 TP, 27% upside. We remain positive on Marco Polo Marine, even though the stock has surged by >20% from SGD0.043 since our last update. MPM remains in a sweet spot to deploy and operate its first commissioning service operation vessel (CSOV) by Dec 2023 or 1Q24 in an environment where such vessels (used to build offshore windfarms) are in short supply. We forecast FY22-24 (Sep) earnings growth at 18% CAGR, led by the new vessel’s deployment at attractive charter rates. The stock remains attractive at 0.6x PEG.

• Well-poised for higher charter rates. Our investment thesis for MPM remains intact, with earnings growth led by stronger demand and higher charter rates. This is being driven by elevated demand for offshore vessels in both the oil & gas (O&G) and offshore windfarm sectors vis-à-vis limited vessel supplies in the market. Vessel demand remains robust, as regional O&G exploration is increasing while North Asian nations build up their offshore windfarms to meet green or renewable energy environmental targets. Meanwhile, there is tight supply for vessels, as bank financing for new ones remains tight while older vessels are being scrapped. There are now c.800 vessels – down from c.1,000 previously – serving both the offshore windfarms and O&G sectors. Additionally, the former market is currently facing a shortage of tier-1 CSOVs with only c.10 now operating – mainly deployed in Europe – while another 30 or so are on order.

• Momentum building up for chartering and shipbuilding businesses. In 1HFY23, MPM’s revenue rose 102% YoY to SGD56m, driven by the ship chartering and shipyard segments. Its average charter rates in 2QFY23 have more than doubled from 1QFY20’s numbers, driven by strong vessel demand from the O&G and offshore windfarm sectors. Average vessel utilisation rates for 1HFY23 were decent at 66% vs 58% in 1HFY22. Shipyard utilisation for 1QFY23 and 2QFY23 were healthy at 74% and 84% on strong ship repair momentum, with new shipbuilding contracts for barges tied up till 1HFY24. Our earnings and TP remain unchanged.

• Key risks. Our forecasts and TP are premised on improved charter rates, stronger utilisation rates, and the successful deployment of MPM’s CSOV – all over the next two years. We believe any underperformance in these aspects will represent downside risks to our earnings estimates and TP. 

• ESG. As MPM’S ESG score is 3 out of 4 – on par with our country median – we apply a 0% discount/premium to its intrinsic value to derive our new TP. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 29 May 2023