Wintermar Shedding Light on Cabotage Ruling

Clarifying the cabotage issue
Last week the media reported that cabotage regulations would be eased to allow foreign companies to operate certain types of foreign-flagged vessels. At a glance, this seems contrary to earlier perceptions that the opportunity would be limited to Indonesian-owned vessels using the domestic flag. We would like to highlight several points to shed more light on the issue:

The original cabotage regulations remain intact, with exemption given to Category C specialized vessels providing oil and gas services which do not transport passengers and cargo from point to point in Indonesian waters. This is because there are inadequate C class vessels that are Indonesian-flagged, which may potentially disrupt the country’s production of oil and gas.

Operators are obliged to use Indonesian-flagged vessels should these be available. Therefore, we believe that the impact would be minimal on Wintermar Offshore Marine (WINS) as it currently only provides class A & B vessels.

Fleet expansion on target
WINS’ revenue-boosting strategy to increase the proportion of new mid & high end vessels (11 new vessels for this year), which will allow it to command rates that are 5x to more than 20x higher than that for old vessels, remains well on track. The Trade Ministry has revised downwards Indonesia’s 2011 output target to 952k barrels of oil per day from the initial 970k.

However, the outlook for WINS’ vessel demand is still positive given that the company adheres to high standards and employs highly experienced staff, which gives it a competitive advantage over its local competitors. It is worth highlighting that the company recently obtained Integrated Maritime Operational Management System certification (ISO 14001:2004 & OHSAS 18001:2007) from Lloyds Register Quality Assurance. This is the first shipping company in Indonesia to have obtained such a certificate.

No dividends for now owing to rapid expansion
WINS has no plan to distribute dividends this year based on its 2010 performance so as to conserve funds for expansion purposes. WINS has secured 4 new vessel purchases currently for this year.

Maintain a BUY
WINS is currently trading at 8.6x 2011 PE, a 58% discount to the sector. We maintain a BUY with a target price of IDR480 (39% upside potential) based on its 2011 target PER of 12x, which implies a 37% discount on the industry average. We will revisit our model once the FY10 results are released.