Logindo Samudramakmur (2014)
Logindo (LEAD) is to book an 83% net profit CAGR for the three years to 2014, spurred by its strong fleet expansion to higher-tier vessels. Its relatively young fleet age, lucrative margins and strong industry track record are precursors of greater things. We initiate coverage with a BUY and IDR3,450 TP, implying an 8.5x 2014 P/E and 0.2x PEG. Despite Indonesia’s headwinds, we believe LEAD is a way to finding alpha in the market.
Company background
LEAD was founded in 1995 by the Logam brothers
In 2005, the company started acquiring vessels and operating in Indonesian waters, shielded by the cabotage policy put in place by the Government that same year. LEAD has been providing outstanding service to Total E&P Indonesie for 15 years – initially supplying services to the latter’s tugs and barges but, along the way, providing higher-end vessel services to upstream oil and gas (O&G) offshore blocks. The company recently acquired a 12,000 horsepower (hp) anchor-handling tug services (AHTS) vessel – one of the few industry high-end vessels operating under the Indonesian flag.
Strong industry growth
Despite the headwinds Indonesia faces and the Government initiatives implemented to steer the economy towards a more stable footing, we expect our domestic offshore support vessel (OSV) universe to book a relatively strong net profit CAGR of 41.2% in 2011-2014. This is driven by: i) the Government’s high oil & gas (O&G) investment allocation, and ii) cabotage regulation that allows Indonesian OSV providers to move into the higher-tier vessel segments. With respect to supporting local upstream offshore O&G activities, we believe that Indonesia still has a long way to go in terms of further vertical expansion in the domestic OSV sector.
BUY with confidence
We believe the high barriers to entry and cabotage policy should keep vessel supply tight, thus supporting high charter rates and utilisation levels. As at 1 Jan 2014, LEAD already had a comfortable backlog amounting to USD35m. We estimate its FV at IDR3,450, an 8.5x implied P/E for 2014, which is a 19% discount to its peers (with a market cap below USD400m) which are trading at an 10.5x average. Key risks are: i) a significant drop in oil prices, ii) lower-than-expected utilisation rate, and iii) being highly leveraged.
Executive Summary
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 enhance investments in exploration activities.
The number of oil and gas (O&G) blocks awarded in the country’s offshore areas underpins the strong OSV demand in Indonesia. By being one of the largest OSV players in Indonesian waters that is equipped with a diversified fleet, we believe LEAD could be a one-stop shop that can cater to the various needs of the offshore O&G blocks.
A wealth of management experience. In 2011, Pacific Radiance (PACRA SP, NR) – via Alstonia Offshore – acquired the maximum 49% stake in LEAD, which brought with it strong operating and human resource improvements. Backed by a strong local network and exposure, we believe this synergy would allow LEAD to tap into the abundant opportunities in Indonesia’s offshore scene.
PACRA is an established OSV company and a subsea-services provider with very senior players inside the company such as Mr Pang Yoke Min – the founder of Jaya Holdings (JAYA SP, NEUTRAL, TP: SGD:0.79). On the other hand, Mr Eddie Logam – the founder of LEAD – is also known as a veteran among players involved in Indonesian waters and has a strong reputation in the OSV industry.
Efficient and integrated OSV player
LEAD has a relatively young fleet – aged nine years on average – and is one of the few Indonesia-flagged vessel owners that has anchor handling tug supply (AHTS) vessels with 12k-brake horsepower (bhp). This is a testament to the company’s commitment to shifting its portfolio to higher-tier vessels. As it is intensively-focused in East Kalimantan waters, serving Total E&P Indonesie as its major customer, LEAD has a competitive advantage in providing full and responsive services.
The group, riding on robust demand, plans to diversify its customer portfolio across the offshore Indonesian O&G industry. It is worth noting that LEAD has maintained a 15-year relationship with Total E&P Indonesie, the largest gas producer in Indonesia. It started out by serving the latter’s small-scale tugs and barges before gradually scaling up its service to higher-end vessels.
Fleet expansion to higher value-added vessels
We expect LEAD to allocate a capex of USD164m from 2014 to 2015 to purchase mid- and high-tier vessels, in order to grow its fleet to 69 vessels by 2015, from 64 vessels in 2014. We expect it to command a higher blended tariff mix when more higher-tier vessels are added to its fleet. Given the strong OSV demand in the industry, we believe the company’s utilisation rate would be intact.
Although it has won contracts for exploration activities for several of its high-end vessels (which are shorter-term in nature), LEAD’s strong network and solid support from PACRA should boost confidence in vessel expansion in terms of risk-adjusted returns.
Trading at a steep discount to its peers
We estimate LEAD’s fair value (FV) at IDR3,450, based on a FY14 target P/E of 8.5x, which is a 19% discount to its domestic and regional peers (which have market caps of less than USD400m each) that are trading at an average of 10.5x. We believe LEAD should be rated against its peers in South-East Asia which benefit from the cabotage or local content ruling, as these companies enjoy higher vessel charter rates, stronger fleet utilisation, favourable reinvestment opportunities and higher earnings visibility.
Valuation Summary
Benchmark against peers which benefit from cabotage or local content ruling
We believe LEAD should be rated against its peers in South-East Asia which benefit from the 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 its peer comparison to companies with market caps of less than USD400m each to reflect the small/mid-cap discount. In Indonesia, we believe LEAD’s closest peer is Wintermar Offshore Marine (WINS IJ, BUY, TP: IDR740), a pure-play OSV player that was listed on the Jakarta Stock Exchange in Nov 2010.
Peers’ FY14F P/Es range from 6.2x to 15.1x, with an average of 10.5x
Based on our data, the average FY14F P/E of the peers we compiled which have market caps of below USD400m is 10.5x.
Our FV for LEAD is at IDR3,450
Our FV of IDR3,450 is derived from a target P/E of 8.5x to its 2014 earnings, which is still a 19% discount to its regional OSV peers (which have market caps below USD400m each), based on their current share prices.
We believe LEAD should not trade below WINS given the former’s: i) more aggressive capital structure, which enables it to achieve a higher ROE of 19% vs the latter’s 16%, ii) stronger net profit growth estimates of 85.0% y-o-y in FY13F and 39.4% y-o-y in FY14F and, iii) partnership with Singapore-based PACRA, which allows the company to access a bigger pool of vessels and tap into the latter’s expertise in vessel financing.
Company Profile
History of Logindo Samudramakmur
Logindo Samudramakmur (LEAD) was founded in 1995 by two brothers, Mr Eddy K Logam and Mr Rudy K Logam. The duo’s first-generation family business provided sea-logging transportation from Kalimantan to Java, which became a stepping stone to expand into higher-end services. In 2005, LEAD started acquiring vessels and operating in Indonesian waters, benefiting from the cabotage policy that was imposed by the Government in the same year. It has been serving Total E&P Indonesie for 15 years and providing the latter with outstanding service.
LEAD started out by providing services to Total E&P’s tugs and barges before moving on to higher-end vessels such as landing craft transport, diving support, crew boats, anchor handling transport supply (AHTS) vessels, hooper barges and accommodation work barges. It is worth noting that LEAD, which possesses two 12,000-bhp AHTS vessels this year, is one of the few players operating high-end vessels under the Indonesian flag. This is a testament to its commitment to the OSV industry.
Business profile
As at Jan 2014, LEAD is exposed to USD141m worth of contracts, with Total E&P Indonesie accounting for 81.3% of total contracts. Pertamina and other companies account for the remaining 18.7%. Most of its contracts are long-term – lasting around 2-3 years. We see that LEAD’s exposure to long-term contracts with its customers provides a safeguard for future earnings. It is worth noting that by the end of 2013, LEAD possessed 59 vessels and had a blended utilisation rate of 83.9%. The majority of its contracts are on time charters for a specific period, based on negotiable rates agreed upon by both parties.
During the tenure of the contract, the customer pays all the trip costs including fuel, port and agent commission costs. LEAD is mostly responsible for the crew, maintenance, spare parts and other operating costs. We view time charter contracts as a fairly safe business as the company can pass on the volatile 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 storing spare parts. LEAD is ISO 9001:2008-certified by Lloyd’s Quality Assurance Register Ltd.
Management background
LEAD’s commissioners and management comprise the Logam family and the PACRA members. Three Logam members are Mr Eddy K Logam (president director and founder), Mr Rudy K Logam (director and founder) and Mdm Merna Logam (commissioner, Eddie Logam’s wife). PACRA, meanwhile, is represented by Mr Pang Yoke Min (president commissioner), Mr. Mok Weng Vai (director) and Mr. Loo Choo Leong (director). We believe such a combination gives rise to strong synergy, with LEAD providing the local exposure and PACRA contributing knowledge, management skills and experience.
Technically-superior OSV fleet
We like LEAD’s fleet of 59 vessels, which range from low-end vessels such as tugs and barges to 12k-bhp AHTS vessels. LEAD has a relatively young fleet age of nine years. Given its experience in dealing with Total E&P Indonesie, its largest customer, it has the opportunity to operate a variety of vessels, such as tugs and barges, AHTS, accommodation work barges (AWB), crew boats, diving support vessels (DSV), landing craft transport (LCT), mooring boats and platform supply vessels (PSV).
Operating these vessels – which have their own crews and captains – requires sound theory and on-the-ground knowledge. We believe LEAD’s strong ties with Total E&P Indonesie reflects its 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 for its customers
LEAD’s strength lies in its strong after-sales services, such as providing customers 24-hour quick and accurate services for engine troubles, docking problems and others, through its shipyard and maintenance centre in Muara Kembang, East Kalimantan, which is open 24 hours every day. This gives LEAD a service advantage over its competitors.
Established base of satisfied customers
Besides having Total E&P Indonesie as its largest customer, LEAD also cooperates with Pertamina, among its largest customers. The group has won awards and recognition in several areas from its customers, including: i) the Health, Safety and Environment award from Total E&P Indonesie’s marine & logistics 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) the third ranking for the Mahakam award from Total E&P Indonesie for health, safety and environment performance for high-risk category in 2012, and iv) Indonesia National Shipowners Association’s best offshore shipowner/operator for 2012.
Macro & Industry Outlook
Offshore O&G industry plays a critical role. Indonesia, which has 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 the Organisation of the Petroleum Exporting Countries (OPEC) until 2008/09, 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, which is equivalent to roughly 10-12 years of mine life.
On the back of declining reserves since 2004, the number of oil exploration blocks awarded has increased significantly to a peak of around 40 blocks in 2009, from around seven blocks in 2005. These blocks are mainly located in deeper waters in the eastern part of Indonesia. The Indonesian Government plans to offer 27 O&G blocks this year to cope with the rise in energy demand and in an attempt to reverse the declining domestic output. The awarding of these blocks – which are expected to be mostly in offshore areas – points to a bright outlook for the OSV industry, which in turn would benefit LEAD.
O&G investments rise at a 19.7% CAGR in 2009-2014
SKK Migas expects 2014 O&G investments to increase by 32.6% y-o-y to USD25.6bn. Based on the breakdown of oil and gas investments in 2014, exploration activities are expected to reach USD3.8bn (+104.6% y-o-y), while administration, development and production activities are expected to increase to USD1.6bn (+6.2% y-o-y), USD5.3bn (+23.1% y-o-y) and USD14.9bn (+24.6% y-o-y) respectively.
Exploration investments are expected to rise at a 43.4% CAGR in 2009-14, given the Government’s efforts to cope with the decline in oil production for the last couple of years. As LEAD’s vessels cater to exploration to production activities, we believe there is plenty of demand for its vessels.
East Indonesia a long-term story.
Eastern Indonesia is not as well-explored compared to the western part of the country, 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 high-end vessels. We believe that the OSV industry in Indonesia should be sustainable in both the short and long term, given that it serves exploration and production activities. The process of an oil and gas discovery to reaching the highest peak of the production cycle takes around 20-30 years. The current aggressive exploration attempts in Indonesia indicate that the O&G industry is far from the down-cycle phase.
Dishing out more incentives to draw investments to offshore blocks
O&G companies operate under various production-sharing contract (PSC) arrangements based on SKK Migas regulations. Generally, the revenue split for oil between the contractor and the Government is between 65:35 and 85:15, while for natural gas, the split is from 60:40 to 70:30 after the contractor has recovered its costs. Better incentives have been proposed for deepwater O&G projects such as: i) a larger PSC portion for contractors of deepwater investments, ii) exemptions on land and building taxes, and iii) zero import duty. This should increase further offshore investments in Indonesia, which in turn would indirectly benefit OSV players.
OSVs in Indonesia divided into three classes
Indonesia’s OSVs are divided into three classes based on agreements between O&G regulators and associations. Group A vessels are already registered as Indonesian-flag vessels, Group B has several Indonesian and foreign-flagged vessels and Group C is dominated by foreign-flagged vessels. Groups B and C require larger vessel investments (~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.
Key Investment Themes
Right time for fleet expansion
We believe this is the best time for vessel operators to expand their fleets to capitalise on the cabotage ruling and gain market share in Indonesia. We expect to see capex for fleet expansion amounting to USD329m from 2013 to 2017, funded mostly by debt. Net gearing is expected to be 91% in 2013 before gradually declining to 88% 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, it is reasonable to have a net gearing level of above 100% as long as the equity and loan payback are thoroughly accounted for.
We expect LEAD to add 3-5 vessels per annum from 2013 to 2017
The group will expand its fleet with higher-tier vessels to garner higher economies of scale. It is worth noting that vessels added to its fleet from 2013 to 2017 are expected to command blended charter rates of around USD17,000-21,000/day whereas existing vessels command blended charter rates of USD7,500-7,800/day. The blended rates for existing vessels (pre-2013) are lower than the new vessel rates as the low-rate tug barge revenue component is still high.
We classify LEAD’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 accommodation work barges (AWBs) 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.
LEAD has high utilisation rates of 88% for its existing vessels and 32% for its new vessels that arrived last year. We expect the utilisation rate for its new vessels to gradually increase to 83% in 2017 from 32% in 2013.
It also has an average fleet age of nine years, which is relatively young compared to its peers. Based on Drewry Maritime Research, as of July 2011, vessel classes such as AHT, AHTS, PSV and supply vessels have age profiles of >10 years. LEAD’s diversified fleet should be able to cater to the demand from a variety of O&G offshore fields.
Operating profit growth even more attractive
We expect operating profit to record an attractive 54% CAGR for 2011-14. Following PACRA’s emergence as a stakeholder in 2011, several operational improvements were made for areas like human resource management and strategic functions within the organisation. This led to an upward salary adjustment and positive developments. Note that in 2012, post-PACRA’s entry, its opex-to-sales ratio declined to 12.1%, compared with 14.7% in 2011.
Strong net profit growth
We expect LEAD to record a net profit CAGR of 83.0% for 2011-14, mainly spurred by its fleet expansion. It is worth noting that shipping/vessel companies are liable for a final tax rate of 1.2%. LEAD’s effective corporate tax rate is <10%, which is lower than the general corporate tax rate of 25%.
Balance sheet analysis
Backed by its vessel expansion capex, we expect LEAD to book a gross fixed asset CAGR of 45.6% from 2011 to 2014. Note that net gearing declined to 1.2x in 2011 from 2.2x in 2010, due to a capital injection from PACRA. In 2011, the majority of LEAD’s borrowings were from local banks and finance companies at very high interest rates. The company subsequently refinanced its local borrowings as offshore loans with Singaporean banks at cheaper rates. This was the main reason its interest coverage ratio increased in 2012 to 4x, from 2.1x in 2011.
Sensitivity Analysis
Utilisation rate sensitivity analysis
In our utilisation rate sensitivity analysis for LEAD’s vessels, we found that a 2% change in its utilisation rate could impact net profit by +/- 7%, while a 6% and 10% change could impact earnings by +/- ~21% and +/- ~35% respectively.
