Logindo Samudramakmur (IPO)

Executive Summary
“Logindo Sukses Makmur (Logindo) is expected to book net profit CAGR of 83% for the three years to 2014, spurred by strong fleet expansion to higher tier vessels. The group has a relatively young fleet age and lucrative margins. Its strong track record with well-known O&G companies is a precursor for greater things to come.”

One of the largest OSV companies in Indonesia
Since Indonesia amended its cabotage law in 2011, domestic fleet owners have been grabbing market share and climbing up the value chain. With the current limited crude oil reserves and declining oil production, the Government hopes to increase existing production and invest in exploration activities.

The number of oil and gas (O&G) blocks awarded in the offshore areas underpins the strong offshore support vessel (OSV) demand in Indonesia. By being one of the largest OSV player in the Indonesian waters equipped with diversified OSV fleet, we believe Logindo could be a one stop shop by catering the various needs in the O&G offshore blocks.

A wealth of management experience
In 2011, Pacific Radiance – through Alstonia Offshore – acquired the maximum 49% stake in Logindo, which bought with it strong operating and human resource improvements. Backed by a strong local network and exposure, we believe this synergy would allow Logindo to tap into the abundant opportunities in Indonesia’s offshore scene.

Efficient and integrated OSV player
Logindo has a relatively young fleet of nine years of age on average and is one of the few Indonesia-flagged vessel owners that owns anchor handling tug supply (AHTS) vessels with 12k brake horsepower (BHP). This is testimony to Logindo’s commitment to shift its portfolio to higher-tier vessels. With intensive concentration in the East Kalimantan waters serving Total E&P Indonesie as its major customer, Logindo has a competitive advantage in providing full and responsive services.

The group plans to diversify its customer portfolio across Indonesian O&G offshore waters, riding on the robust demand. It is worth noting that Logindo has maintained a 15-year relationship with Total E&P Indonesie, the largest gas producer in Indonesia. It started off by serving the latter’s small scale tug and barges before gradually scaling up its service to higher-end vessels.

Focus on higher value-added vessels
We expect Logindo to allocate capex of USD244m from 2013-15 to purchase mid- and high-tier vessels to raise its fleet from 55 vessels in 2012 to 69 vessels by 2015. We expect Logindo to command a higher blended tariff mix when more higher-tier vessels join its fleet. Given the strong OSV demand, we believe its utilisation rate would be intact.

Valuation range of IDR1,786bn to IDR2,807bn
We believe the high barriers to entry and cabotage protection should keep vessel supply tight, thus supporting high charter rates and utilisation levels. We estimate Logindo’s fair value (FV) to range from IDR1,786bn to IDR2,807bn, based on FY14 target P/E of 7.0x to 11.0x. At the bottom-end of our valuation range, our target P/E of 7.0x is based on 10% discount to Wintermar Offshore Marine Group (WINS, BUY, TP: IDR640) while at the top-end of our range, our target P/E is pegged to the average FY14F P/E for OSV players in Malaysia and Indonesia.

Valuation Summary
Benchmark against peers that benefit from cabotage or local content ruling. We believe Logindo should be rated against the regional peers in Southeast Asia that benefit from cabotage or local content ruling as these companies enjoy higher vessel charter rates, stronger fleet utilisation, favourable reinvestment opportunities and higher earnings visibility.

We also filter down the peers comparison to companies with less than USD400m market cap to reflect the small/mid-cap discount. In Indonesia, we believe Logindo’s closest peer is Wintermar , a pure-play OSV player listed on the Jakarta Stock Exchange in 2010.

Peers FY14F P/E range from 5.0x to 13.3x, with an average of 11.0x
Based on our peers compilation, Singapore-listed Marco Polo Marine (MPM SP, BUY, SGD0.61) has the lowest valuation at 5x FY14F P/E and Malaysia-listed Perdana Petroleum (PETR MK, Neutral, MYR1.80) has the highest valuation at 13.3x FY14F P/E. The average FY14F P/E in our peers’ compilation is 11.0x.

We value Logindo at IDR IDR1,786bn to IDR2,807bn.
Our floor value is pegged to 7.0x FY14F P/E, 10% discount to WINS, which is trading at 7.7x FY14F P/E. On the downside, we believe Logindo should not trade below WINS given: i) its more aggressive capital structure enables them to achieve higher ROE of 19% versus WINS’ 16% and regional peers’ average of 16%; ii) stronger net profit growth of 75% in FY13F and 47% in FY14F and; iii) Logindo’s partnership with Singapore-based Pacific Radiance allows the company to access a bigger pool of vessels and tap Radiance’s expertise in vessel financing.

At the top end of the our valuation range, we value Logindo at 11.0x FY14F P/E, in-line with regional peers in our list. This is a 10% premium to our target P/E of 10x for WINS, which we have a BUY rating and FV of IDR640.

IPO Structure
IPO details
In its IPO, Logindo is proposing to issue 193.3m new shares, equivalent to a maximum 30% of its total number of outstanding shares. Post listing, the stakes of main shareholders Altsonia Offshore, Rudy Kurniawan Logam and Eddy Kurniawan Logam will drop to 34.3%, 17.9% and 14.3% respectively.

Company Profile
History of Logindo Samudramakmur. Logindo Samudramakmur (Logindo) was founded in 1995 by two brothers, Eddie K. Logam and Rudy K. Logam. The duo’s first generation family business provided sea-logging transportation from Kalimantan to Java, which was a stepping stone to expand into the higher-end game later on. In 2005, Logindo started acquiring vessels and operating in Indonesian waters, basking in the comfort of the cabotage principle imposed by the Government the same year.

It has been serving Total E&P Indonesie for 15 years and providing the latter outstanding service. Logindo initially started by providing services to Total E&P’s tug and barges but along the way, started serving higher-end vessels such as landing craft transport, diving support, crew boats, anchor handling transport supply (AHTS), hooper barges and accommodation work barges. It is worth noting that Logindo acquired a 12,000 bhp AHTS this year, which is the largest Indonesian-flagged AHTS vessel. This is a testament to Logindo’s commitment to the OSV business.

Business profile
As at 1H13, Logindos’ contract value with Total E&P Indonesie accounted for 87% of its total contracts, while Pertamina, CNOOC, Newmont and WINS respectively accounted for 7%, 1% 4% and 1%. As at 1H13, 23% of the group’s total contracts are for 4-5 years, 4% are 3-4 years contracts, 44% are 2-3 years contracts, and the remaining 29% are contracts of less than 2 years. We see that Logindo’s exposure to long term contracts with its customers provides a safeguard for future earnings. It is worth noting that in 1H13, Logindo possessed 56 vessels, with a utilisation rate of 87.7%.

The majority of its contracts are on time charters for a specific time based on negotiable charter rates agreed upon by both parties. During the tenure of the contract, the customer is liable to pay all the trip costs including fuel, port and agent commission costs. Logindo is mostly responsible for the crew, maintenance, spare parts and other operating costs. We view time charter contracts as a fairly safe business as Logindo can pass on the volatility in fuel costs to its customers.

The group has a shipyard and repair workshop in Muara Kembang, East Kalimantan for repairing its own OSVs, providing employee training and for storing spare parts. Logindo is ISO 9001:2008-certified by Lloyd Body’s Quality Assurance Ltd’s Registers.

Management background
Logindo’s commissioner and management comprise three family-related parties – Eddie K. Logam (president director; founder), Rudy K. Logam (director; founder) and Merna Logam (commissioner; Eddie’s wife). From the Pacific Radiance, meanwhile, is represented by three individuals – Pang Yoke Min (president commissioner), Mok Weng Vai (director) and Loo Choo Leong (director). We believe such a composition gives rise to strong synergy, with Logindo providing the local exposure and Pacific Radiance contributing knowledge, management skills and experience.

Technically-superior OSV fleet
We like Logindo’s portfolio of 56 vessels in 1H13, which range from low-end vessels such as tug and barges to a 12k bhp AHTS vessel. Logindo has a relatively young fleet age of nine years. Given its experience in dealing with Total E&P Indonesie, its largest customer, Logindo has the opportunity to operate a variety of vessels, such as tug and barges, AHTS, accommodation work barge (AWB), crew boat, diving support vessel (DSV), landing craft transport (LCT), mooring boat, and platfrom supply vessels (PSV).

Operating these vessels, which have their own crews and captains, require sound theory and on the ground knowledge. We believe Logindo’s strong ties with Total E&P Indonesie reflects discipline and professionalism in getting the job done, which would in turn attract other O&G companies when it tenders for jobs.

Facility shipyard to support OSV services to its customers. Logindo’s strength lies in its strong after-sales services, such as providing its customers 24-hour quick and accurate services for engine troubles, docking problems and others, through its shipyard and maintenance centre in Muara Kembang in East Kalimantan, which is open every day. This gives Logindo a service advantage against its competitors.

Established base of satisfied customers
Besides having Total E&P Indonesie as its largest customer, Logindo also cooperates with Pertamina, also among its largest customers. The group has obtained awards and recognition in several areas from its customers, including: i) the Health, Safety and Environment award from Total E&P’s marine & logistic division for safety, awareness and good housekeeping category, ii) quality, health, safety and environment award from BP Migas & CNOOC for having minimal accidents in 2011, iii) third ranking in the Mahakam award from Total E&P for health, safety and environment performance for high risk category in 2012, and iv) INSA best offshore shipowner/operator for 2012.

Macro & Industry Outlook
Offshore O&G industry plays critical role
Indonesia, with the fourth largest population in the world of around 237m, is the largest archipelago country with the ocean comprising two-thirds of its total area. Indonesia used to be a member of Organisation of the Petroleum Exporting Countries (Opec) until 2008/2009, six years after becoming a net oil importer. Oil production has been declining for more than a decade due to underinvestment in exploration activities, causing reserves to remain low at 3.7bn barrels, equivalent to roughly 10-12 years of mine life.

On the back of declining reserves since 2004 and the introduction of the cabotage principle in 2005, the number of oil exploration blocks awarded has increased significantly, from around seven blocks in 2005 to a peak of around 40 blocks in 2009. These blocks are mainly located in deeper waters in the eastern part of Indonesia. YTD, the Government has awarded 14 blocks. The awards of these blocks point to a bright outlook for the OSV industry, which will benefit Logindo.

Boosting exploration activities
The Government has allocated IDR193.8trn (USD17.6bn) for this year’s fuel subsidy post the hike in fuel price from IDR4,500/litre to IDR6,500/litre, which is expected to save around IDR30-34trn. This is a positive Government initiative in a bid to use its budget allocation more wisely.

As fuel imports strain the fiscal budget, we see this as the right time for the Government to pump up its O&G exploration investments. According to SKK Migas, exploration activities for 2013 amounts to USD2.3bn, which is a 51% CAGR from 2010 to 2013, an indication that the Government is taking this critical issue seriously.

East Indonesia a long term story
Eastern Indonesia is not well explored compared to the western part of Indonesia, which has been explored for 125 years. This is due to the region’s deep waters, poor infrastructure, remote onshore location and the lack of understanding of its geology. Exploration activities in deeper waters require very high-end vessels. We believe the OSV business in Indonesia should be sustainable in both short and long terms, given that it serves exploration and production activities.

Dishing out more incentives to draw investment to offshore blocks. Indonesian O&G companies operate under various production sharing contract (PSC) arrangements based on SKK Migas regulations. Generally, the split for oil is between 65:35 and 85:15, while for natural gas, the split is from 60:40 to 70:30 after a contractor has recovered its costs. Better incentives have been proposed for deep water O&G projects such as: i) a larger PSC portion for contractors of deepwater investments, ii) exemption on land and building taxes, and iii) zero import duty. This should attract further offshore investments in Indonesia, which in turn would indirectly benefit OSV players.

OSVs in Indonesia divided into 3 classes
Indonesia’s OSVs are divided into three classes based on agreements between O&G regulators and associations. Group A types of vessels are already Indonesian-flag registered, Group B has several Indonesia and foreign-flagged vessels whereas Group C is dominated by foreign-flagged vessels. Groups B and C require larger investment (~USD15m and ~USD40m respectively) compared with Group A. However, with the cabotage regulation pushing towards higher-end vessels which have larger capital requirements, such investments would be protected.

More vessel jobs needed going forward
Based on Figure 19, 235 OSVs will be needed from 2011 to 2015. AHTS features most prominently this year given the cabotage deadline for AHTS-type vessels. Several listed players have been expanding their fleet with AHTS vessels, as in the case of Logindo, which has purchased several AHTS vessels. The Government has set 2014 as the cabotage deadline for higher-end vessels used for O&G drilling purposes such as the seismic, geophysical and geotechnical survey types of vessels.

The 2015 cabotage deadline will apply to rigs for drilling purposes such as jack-up rigs, semi-submersible rigs, deep water drill ships, tender assist rigs and swamp barge rigs. We see more capital required by OSV players to better cater to the vessel needs arising from heightening exploration activities.

The youngest AHTS fleet
According to Clarkson Services, there are 90 AHTSs, 14 AHTs and 6 PSVs registered as Indonesian-flagged vessels as per August 2013. Pertamina, Baruna Raya Logistic, Bahtera Niaga and Wintermar have more AHTS vessels than Logindo, but the latter has the youngest average AHTS fleet age among Indonesian-flagged vessels.

Key Investment Themes
Right time for fleet expansion. We believe this is the best time for vessel operators to expand their fleet to capitalize on the cabotage ruling and gain market share in Indonesia. We expect to see capex for fleet expansion surging to USD329m from 2013 to 2017, funded mostly by debt. Net gearing is expected to be 95% in 2013 before gradually declining to 89% in 2017.

As the OSV industry is capital intensive in nature, one of the key business decisions is to determine when to leverage. In view of the cabotage regulations and tight supply market conditions, it is reasonable to have a net gearing level of above 100% as long as the equity and loan payback are accounted for.

We expect Logindo to add 3-5 vessels per annum from 2013 to 2017
The group will expand its fleet with higher-tier vessels to garner better margins and higher economies of scale. It is worth noting that its fleet expansion from 2013 to 2017 is expected to command blended charter rates of around USD17,000-21,000/day whereas existing vessels are commanding blended charter rates of USD7,500-7,800/day. The blended rates for existing vessels (pre-2013) is lower than the new vessel rates as the low-rate tug barge revenue component is still high.

We classify Logindo’s low mid and high tier vessels based on the tariff for each vessel type charged to its customers. We categorise flat top barges, landing craft transport, tugs, crew boats and AHT/utility vessels as low-tier vessels and AHTS, diving support and AWB as mid to high-tier vessels. From the 21 vessels we expect to be delivered from 2013 to 2017, 16 vessels are in the mid to high-tier category.

High margin, young age fleet, high utilisation rate
Logindo has a relatively high attractive EBITDA margin of around 47-53%. This is because its vessel revenue is fully derived from its own vessels, rather than a mix of its own vessels and back-to-back third party re-chartered vessels as its revenue source. In Figure 27, we believe that Logindo’s vessel expansion from 2013 to 2017 will provide attractive blended gross margin at the 50% level.

Logindo has a high utilisation rate of 88% for its existing vessels and 34% for its new vessels that arrived this year. We expect the utilisation rate for its new vessels to gradually increase from 34% in 2013 to 87% in 2017. Logindo has an average fleet age of nine years, relatively young vs peers’. Based on Drewry Maritime Research, as of July 2011, vessels classes such as AHT, AHTS, PSV and supply base have age profiles of >10 years. Logindo’s fleet diversification should be able to cater to the demand for a variety of O&G offshore fields.

Strong earnings visibility for 2013-14
Based on its ongoing contracts as at Aug 2013, the company is expected to carry over contracts amounting to USD44m and USD21m to 2013 and 2014 respectively. Logindo is selective in its vessel purchases and is inclined towards long-term contracts to ensure favourable utilisation rates. It also prefers visible and favorable equity payback periods of 3-4 years. Jobs ahead will have a mix of short-term contracts of <1 year. Short-term contracts will be a trend going forward given that the industry will partially shift to exploration activities, which have shorter working contracts but usually command better charter rates.

However, given the increasing O&G offshore exploration demand, there are vast opportunities for renewable short-term contracts or numerous new OSV work tenders. Note that only two of Logindo’s vessels are operating in exploration activities while its remaining vessels are in production activities.

Ready to become a national OSV hero
Logindo has the strong ability and discipline to cater projects surrounding the Kalimantan waters. This is one of the reasons why Logindo has been Total E&P’s largest OSV client, accounting 18% of Total E&P’s demand. Equipped with high expertise, strong track record and diversified fleet, we believe Logindo could penetrate further to offshore areas throughout Indonesia.

It is worth noting that Logindo has solid experience in Kalimantan waters and has invested its planted assets (offices and shipyard) there to make its operations economically efficient. This gives it an edge in serving its clients, making it one of the few to be able to offer a 24-hour response time for any complaints and strong after sales services.

Serving top-tier O&G clients
Logindo’s top two clients are Total E&P Indonesie and Pertamina. Total E&P is Indonesia’s largest gas producer and the third-largest oil producer in Indonesia, based on March 2012 data from SKK Migas. Pertamina, a state-owned company, is Indonesia’s fourth-largest gas producer and the second-largest oil producer. Highly experienced in serving its top-tier clients, Logindo is equipped with high professional standards to meet new challenges in Indonesian waters. Based on SKK Migas’ 2013 state budget O&G target, only five companies are able to exceed work, planning & budget (WP&B) gas volume realisation, with Total E&P Indonesie ranked as the highest in terms of exceeding the WP&B.

Strong support from foreign partner Pacific Radiance Group
Logindo is categorised as a foreign investment company after Pacific Radiance Group, a well-known OSV company based in Singapore, acquired the former’s 49% stake. It is worth noting that the acquisition is in accordance with the maximum foreign ownership in a domestic-flagged vessel company based on Government regulation PP Indonesia no.36 2010.

At the point of acquisition, Logindo already owned five AHTS vessels with 3,200 bhp, 3,800 bhp and 5,150 bhp. This indicates that the domestic partner already has local experience in the OSV and is willing to pursue further expansion to leverage on the cabotage momentum. Meanwhile, the main businesses of the Pacific Radiance Group are shipbuilding, ship operations and maintenance, ship equipment rentals and technical related services. Logindo believes that Pacific Radiance Group’s experience and network will give it added value.

Key Risks
Dependent on O&G. The O&G sector is a highly cyclical industry, with capex and opex of O&G companies determined by fluctuations in oil prices. However, given the strong exploration activities in Indonesia and its cabotage regulation, the nation’s OSV industry should not be affected by short-term volatility in oil prices.

Concentration risk
A large portion of its contracts is derived from its largest customer, Total E&P Indonesie. If Logindo has a contract default with the latter, its earnings could be significantly affected.

Lower-than-expected utilisation rates
Fewer jobs secured by its OSV players could threaten its earnings. At present, we like Logindo’s long-term contracts portfolio with secure earnings. However, the current trend in exploration activities is skewed towards short-term contracts. For Logindo to expand, it needs to increase exposure to short-term contracts, which may lead to higher utilisation risks.

Forex gains/losses
Almost all of its revenue is in USD, while a large part of its operational costs is in IDR and its debt is a mix of IDR and USD. Significant changes in the currency exchange could impact Logindo’s earnings.

A highly-leveraged industry
The OSV industry is a highly leveraged business. As vessel purchases require huge investments, hefty loans or equity-raising from financial institutions is a norm.

Financial Analysis And Forecasts
Robust revenue growth
Logindo posted a revenue CAGR of 46% for 2011-2014. We expect its 2013-14 revenue to rise by 70.2% and 40% y-o-y respectively, driven by its fleet expansion to mid- to high-tier vessels. The addition of nine vessels in 2013 and 2014 is expected to contribute 13.9% and 39.7% respectively to 2013 and 2014 revenue.

Stable gross margin
We expect gross profit CAGR of 48% from 2011-2014. Logindo’s gross margin was relatively stable at 49-53% from 2010 to 2012. We estimate gross margin at 50.0% in 2013 and 50.8% for 2014. The group’s major costs are depreciation, salaries and fuel, which respectively ate up 31%, 23% and 14% of its 1H13 revenue.

Operating profit growth even more attractive
We expect operating profit to record an attractive 53% CAGR for 2011-2014. Following Pacific Radiance’s emergence as a stake holder in 2011, several operational improvements were made, such as in human resource management and strategic functions within the organisation. This led to an upward salary revision and positive developments. Note that in 2012, post-Pacific Radiance’s entry, opex-to-sales ratio declined to 13.2%, compared with 15.8% in 2011.

Strong net profit growth. We expect Logindo to record a net profit CAGR of 83% for 2011-2014, mainly spurred by its fleet expansion to fulfill its contracts. It is worth noting that as shipping/vessel companies are liable for a final tax rate of 1.2%, Logindo’s effective corporate tax rate is <10%, compared with the general corporate tax rate of 25%.

Balance sheet analysis
Backed by its vessel expansion capex, we expect Logindo to book gross fixed asset CAGR of 45.7% from 2011 to 2014. However, we expect net gearing to decline from 2010’s 2x to 1x in 2014. Note that net gearing declined to 1.2x in 2011 from 2.2x in 2010 due to capital injection from Pacific Radiance.

In 2011, the majority of Logindo’s borrowings were from local banks and finance companies at very high interest rates. Logindo subsequently refinanced its local borrowings to offshore loans with Singaporean banks at cheaper rates. This was the main reason its interest coverage ratio increased in 2012.

Sensitivity Analysis
Utilisation rate sensitivity analysis. In our utilisation rate sensitivity analysis for Logindo’s vessels, we found that a 2% change in utilisation rate could impact net profit by +/- 7%, while a 6% change in utilisation could impact net profit by +/- ~21%, and a 10% change in utilisation rate could affect net profit by +/- ~35%.