WINS the Game (1)
Wintermar Offshore Marine (WINS) is set to deliver an earnings CAGR of 32.8% from 2010-2012 powered by higher rates from its owned vessels, which will bolster its 2011 topline to IDR864bn (+34% y-o-y) before escalating to IDR1,052bn (+21.7% y-o-y) in 2012. The company’s owned vessels will contribute 71.9% of total revenue in 2011 against 56% in 2010. The implementation of cabotage regulations this year will provide the upside and enable WINS to garner a bigger slice of the market.
Cabotage principle presents opportunities
As an Indonesia-flagged carrier, WINS is poised to deliver strong 2011 earnings (+36.7% y-o-y) of IDR142bn, which will reach IDR184bn in 2012, supported by fleet expansion to ride on the momentum created from the implementation of regulations related to the cabotage principle in May, which will bar foreign-flagged vessels from operating in Indonesia’s coastal waters. It is worth highlighting that most of WINS’ competitors would primarily be foreign vessels in the high-end market.
Robust oil demand equals more intense upstream activities
WINS is a strong player in the domestic market and operates vessels in Thailand and India. Oil production demand is a catalyst to its earnings growth as higher oil production should translate into heightened upstream activities. This would be a good for WINS since Indonesia’s Supervisor & Controller for Oil & Gas Upstream Activities (BP Migas) is targeting to crank up oil production to 970k barrels per day this year, up from last year’s 954k.
Higher tariffs
WINS’ strategy to enhance profit is by increasing the proportion of new mid & high end vessels as these command higher rates of up to USD18,000, which can be 5x to more than 20x higher than those of old vessels. The higher rates should inflate WINS’ revenue going forward. The company charters vessels from 3rd parties and lease them to its customers if WINS’ own vessels are unable to meet its clients’ specific or special requests. It also provides additional services such as catering, crew employment and training as to become a “one stop shop” for such services.
Huge investments
Capex for 2011 would be at about USD100m in order to finance the purchase of 11 new vessels. This would be funded by secured loans and internal cash. As such, WINS’ net gearing is expected to increase to 84.7% from 20.7% in 2010.
Initiate with a buy
WINS is currently trading at 8.1x 2011 PE, 59% and at a 41% discount to sector and market respectively. We derive our target price of IDR480 based on its 2011 target PER of 12x, which implies a 39% discount on the industry average. We initiate coverage with a BUY rating as our TP provides an attractive 48% upside potential.
BUSINESS MODEL
World-class service
Established in 1970, Wintermar Offshore Marine (WINS) operates offshore support vessels for companies involved in oil & gas exploration and production (E&P). In 1995, WINS won its first tender from Chevron, one of the world’s largest integrated companies. Since then, the company has embodied high standards and attained renowned quality certification. What sets WINS apart from its local competitors is that the company offers additional services (heterogeneous) such as providing catering, crew employment and training so as to become a “one stop shop”. As a result, WINS has been able to mantain good long-term relationships with its clients.
Owned vessels: Leasing its own vessels to third parties that command tariffs based on 3 classes – the low, mid and high-end tiers. This will contribute 72% of total revenue in 2011, at an average gross margin of 40%.
Chartered vessels: WINS charters vessels from third parties and lease them to its clients to meet different requirements. The third parties are from other companies/competitors, mostly with a foreign flag. Revenue from chartered vessels is subject to volatility since it is difficult to predict the dynamics of determining vessel needs. Last year, this contribution stood at 39% of total revenue but we expect this to decline to 24% this year.
Other services: WINS also provides value-added services such as ship management services such as catering and sale of inventory. We expect a 3-5% revenue contribution from these services.
Fetching higher tariffs by adding new vessels. WINS’ strategy to boost revenue is to add new vessels that command higher rates of up to USD15,000/day compared with its low-end vessels’ USD300 – USD3,000/day. It is worth highlighting that WINS has 15 different types of vessels with an average utilization rate of 70% – 75%.
Relatively young fleet
Due to WINS relatively young fleet which has an average age of 8 years, WINS is able to have a low maintenance cost level, contributing 6-9% of total costs as new vessels requires less repairs and is more reliable and efficient.
Charter expenses the largest cost component
Charter expense is WINS’ largest cost component as chartered vessels fetch a very low average gross margin of 3%. Last year, charter expenses comprised 54% of total COGS. However, as we expect the company to receive new owned-vessels going forward, charter expenses will go down to 35% and 32% for 2011 and 2012 respectively.
High quality standards
WINS is prudent in terms of safety, as proven by its focus on safety management by obtaining domestic and international certification such as from International Ship and Port Facilities Security Code (ISPS) and American Bureau of Shipping (ABS). WINS maintains good relationships with its clients, as can be seen when Chevron gave it an ‘A’ grade for performance. This shows that WINS has attained the minimum required standards to be an oil contractor to major international oil & gas companies such as Chevron, Exxon and Conoco Phillips.
Capability to track efficiency
WINS has an integrated communication and monitoring system between its offshore and onshore operations, which helps the company to keep track of procurement, fuel usage and movement of vessels via an online and real time system. We believe that the company has the ability to review its operational performance at the detailed level which will enhance efficiency going forward.
Domestic competitor
We understand from management that WINS will not release its 3Q10 results but would release its FY10 financials in 1Q11. WINS’ closest domestic peer is Rig Tenders Indonesia (RIGS), which charters vessels and accommodates work barges to offshore oil and gas companies. Below is RIGS’ 9M10 results compared to 9M09.
Implementation of cabotage ruling
WINS, as an Indonesian flag carrier, is poised to deliver strong 2011 earnings (+36.7% y-o-y) of IDR142bn, which will reach IDR184bn (+29.2% y-o-y) in 2012 supported by fleet expansion to capitalize on implementation of the cabotage principle in May this year. This regulation bars foreign-flagged vessels from operating in Indonesian coastal waters unless their owners are in joint ventures with not more than 49% foreign ownership.
Based on exhibits 7 & 8, there are only 63 foreign flags in Indonesia, comprising 12% of national vessels. However, the foreign flags get the bigger piece of the revenue pie of 56%. It is worth noting that regardless of whether cabotage would be implemented, management believes that the company would still achieve financial growth.
Conducive geographical location
Indonesia is the world’s largest archipelago, with approximately 17,500 islands and has the 2nd largest shoreline at approximately 95,000 km. This provides ample opportunities for WINS to secure projects in offshore blocks. In 1999, there were less than 5 off-shore oil blocks but in 2009, government awarded oil blocks rose to almost 30, indicating the increase of demand for offshore service support.
Robust oil demand
As a fleet support provider for exploration development of production and post-production activities, WINS is a strong player in the domestic market and has vessel destinations across Asia such as in Thailand and India. The company has the flexibility of shifting its operations abroad if domestic oil demand declines, which makes it defensive in nature. It is worth highlighting that WINS is the least sensitive to oil price given that its clients tend to give out fixed long-term contracts and would not pass the burden to upstream service based companies such as WINS.
Indonesia’s Supervisor & Controller For The Oil & Gas Upstream Activities, BP Migas, has been committed to support all efforts to boost the country’s oil and gas production. In 2010, Indonesia failed to reach its oil production target of 960k barrels per day, which came in at only 954k. However, this year, the country has set a target to crank up oil production to 970k barrels per day, which is in line with the 18.5% growth target in oil & gas investments exceeding USD16bn this year.
Growth to come from higher tariffs
We expect WINS’ revenue from owned vessels to reach IDR622bn (+72.6% y-o-y) in 2011 and climb to IDR801bn in 2012 (+28.8% y-o-y), translating into a CAGR of 49% from 2010-2012. Its strategy is to increase the proportion of new mid & high end vessels to enable it to command higher rates up to USD18,000, which is 5x to more than 20x higher than that for old vessels.
This is achievable as WINS plans to add 11 new vessels this year. Note that 7 vessels have been purchased this year, comprising 6 mid-tier vessels and 1 high-tier vessel, while the remainder is still under negotiations. The revenue portion contributed by owned vessels in 2009, 2010, 2011 and 2012 will be 63%, 56%, 72% and 76% respectively.
We expect WINS’ net gearing to rise significantly to 84.7% in 2011 from 20.7% in 2010 as the new vessels purchased will mostly be financed with debt. Note that WINS has obtained loan facilities. However, as a trade-off, WINS’ 2011 net profit would increase to IDR142bn (+36.7% y-o-y) before hitting IDR184bn (+29.2% y-o-y) in 2012, mainly driven by operating margin improvement from 27.4% in 2011 to 33.0% in 2012. Note that the 2011 capex for the purchase of 11 new vessels of about USD100m would be funded by loans and internal cash. In 2011, the company’s interest-bearing debt would be at the IDR1trn level.
Valuation
Our target price for WINS at IDR480 is based on a targeted 2011F PE of 12.0x, which implies a 39% discount on the industry average. We assign the discount to reflect WINS’ smaller market cap of USD130m compared to its peers, which are all above USD300m. On the bright side, we believe WINS presents investors with worthwhile exposure given its solid fundamentals and the potential upside arising from the cabotage principle. A major caveat on the counter is its low liquidity, with trading value averaging USD1.0m since its listing.
Risk Factors
1. High standards of procedures
WINS’ business is linked with high quality and safety standards. Any standard operating procedure or workers not meeting its standards could harm the company’s reputation and lead to loss of customers.
2. Fuel price volatility
Due to its exposure via fuel usage, cost volatility might occur given the recent historical downturn on oil price. It is worth noting that back in 2008, oil price fell from the peak of USD147/bbl to USD40/bbl. Fortunately, WINS was able to secure a long-term fuel price contract which resulted in its fuel costs increasing by only 4.6% y-o-y in 2008. Another positive in its favour is the company is able to pass on the fuel price burden to its customers.
3. Human resource risk
Currently WINS is managed by senior employees with vast experience and who are specialists in the operation side of its business. In the event of the existing employees resign or retire, and the new ones are unable to meet the existing standards, the company’s business activities may be disrupted given their complexity.
4. Dependence on long-term contracts
Most of the company’s vessels are under a time charter contracts. This means that currency, oil and inflation dynamics might add to the uncertainties faced by the business.
5. Liquidity risk
With a market cap of USD130m and a daily trading value of USD1.0m, WINS might not appeal to some investors given its relatively poor liquidity. One has to consider this carefully as any extreme negative movement in the overall market might cause the liquidity in small cap counters such as WINS to shrink drastically.
