Wintermar Outlook Bright, For Both Long & Short Term
We trim WINS’ FY13-FY14 earnings forecasts by 2% and 8% on the back of high crew costs due to the growing demand for expertise in the OSV market. Its recent announcement of a share buyback plan should lead to positive sentiments. 21 oil and gas (O&G) industry blocks tender rights which are mostly offshore this year is a strong catalyst to WINS. Our IDR640 TP implies 10x FY13 P/E. The company’s good track record and bright short- and long-term outlook may also prompt a re-rating.
Revenue upgrade but higher crew costs will eat into earnings
We increase our FY13-FY14 revenue forecasts by 5% and 6% as we factor in slightly higher time charter rates, especially for the mid and high tier vessels, and increased vessel re-charter revenue contribution assumption. Based on our channel check, OSV time charter rate is around 15% above regional rates, indicating strong demand for and lack of domestic flagged vessels in the market.
However, WINS is unlikely to see margin expansion this year due to steeper crew costs – we foresee that it would have to hire more people as crew turnover would be high on the back of the intensifying competition in the industry.
Positive sentiment from share buyback
We view the buyback plan as a positive as it would translate to better EPS and ROE. Note that WINS has a solid operating cash flow and relatively healthy balance sheet – its net gearing is way below 1x, and we project that its cash balance will be maintained at USD23m and USD12m for FY13 and FY14 respectively.
Positive industry outlook
Indonesia recently opened a rights tender for 21 oil and gas (O&G) exploration blocks, 17 of which are offshore, mostly in the eastern half of the archipelago. These areas are estimated to contain up to 3.1bn barrels of oil and 57.6trn cubic feet of gas, according to Edy Hermantoro, the O&G director general of the Energy and Mineral Resources Ministry. We believe that bidding for the blocks, set to begin in mid-June, would provide a strong catalyst to WINS’ share price.
Maintaining BUY
We maintain our TP at IDR640, with a BUY call. The company’s solid track record coupled with its bright short- and long-term outlook could herald a potential re-rating.
Details on share buyback
Triggers positive sentiment
On 21 May, WINS announced plans to buy back up to 190m shares, or 5.25% of its issued capital, within 18 months i.e. between 20 June 2013 and 19 Dec 2014. It is allocating USD10.5m for the transaction, translating to IDR536/share, to be funded from retained earnings. Note that WINS had last year issued USD10m worth of three-year convertible bonds (CB) with a 4.5% interest rate. Full conversion of the CBs, at a conversion price of IDR500/share, would translate to 190m shares.
With the repurchase plan, WINS can give the CB holders who convert their CBs the shares it buys back, and thus preventing a dilution in the company’s shareholding. As such, we view this buyback exercise as positive for WINS’ capital structure as it would translate to better EPS and ROE. Note that WINS has a solid operating cash flow and relatively healthy balance sheet – its net gearing is at 70%, and we project that its cash balance will be maintained at USD23m and USD12m for FY13 and FY14 respectively.
Assuming the treasury stock from the buyback exercise is taken out of the EPS calculation, our back of the envelope calculation puts WINS FY13-FY14 P/E valuation at 8.3x and 7.2x, up from our existing assumption of 8.7x and 7.6x. Meanwhile, ROE could be lifted to 14.7% for FY13 and 15.4% for FY14 from our current forecasts of 14.2% and 14.6% respectively. This is based on a USD/IDR assumption of IDR9,600.
