Wintermar Tender ban unlikely to sink WINS

In a recent newsletter, Wintermar Offshore Marine (WINS) touched upon an unfortunate incident that resulted in tragic consequences for the crew of a small fishing vessel. Due to this episode, its PT Wintermar (subsidiary) has been prohibited from submitting tenders for one year by industry regulator SKK Migas. We believe the impact of this ban is limited as there are avenues available to WINS to circumvent this.

Little impact to 2013 earnings
We see little impact to WINS’ eight vessel expansion plan from the SKK Migas ban, thus our earnings assumption of USD23m (+15% y-o-y) remains intact. This is because the company is able to use third-party brokers to secure the contracts that PT Wintermar is disqualified from. The downside is that it will be charged 2%-5% of the time charter revenue earned by such brokers.

Note that WINS had seven vessels delivered in Jan-May 2013, with another to come in 2H13. Assuming a 3.5% commission from the time charter revenue is charged to WINS’ new vessel expansions this year, impact to its 2013 bottomline will be minimal (-1%). The shipping services firm’s current contract in hand of around USD208m will not be affected from the PT Wintermar ban.

New tenders to come despite the incident
The SKK Migas ban only applies to PT Wintermar and only to existing tenders it has already submitted but yet to receive. We believe this is a non-issue for WINS as the company has 11 subsidiaries excluding PT Wintermar and all of them are free to submit tenders for projects. PT Wintermar’s existing contracts are also still valid and binding. Thus, we believe that WINS can obtain many more tenders moving forward given the limited supply of offshore support vessels (OSVs) supply in the market. We see this loophole strategy as the one most likely to be utilized by the company.

Tackling the reputational risk
We like WINS efforts in striving to further elevate its current SOP via ongoing risk-assessment protocols, and implementation of more rigorous checks and performance evaluations. This is alligned with our previous report “Outlook Bright, For Both Long & Short Term – 24 May 2013”, which states that crew costs would be high ensuring more quality people to join on board with the company.