CGS International analysts Meghana Kande and Lim Siew Khee have initiated coverage on offshore and marine (O& M) players Marco Polo Marine 5LY (MPM) and Pacific Radiance RXS with &ldquo add&rdquo calls and target prices of 8 cents and 7 cents respectively on the back of positive sector outlook. 

 

In their Dec 12 report, the analysts note that both players are poised to benefit from their positions as ship charterers and yard owners, as vessel owners continue to benefit from a tight supply environment and elevated charter rates.

 

Year-to-date, the pair add that average offshore rig utilisation, a proxy for oil and gas (O& G) production activity, remains high at 80% and is forecasted to reach 88% by 2028. Offshore wind capacity is also expanding in Taiwan, Japan and South Korea to meet their combined targets of 37.4 gigawatts (GW) by 2030. 

 

Kande and Lim note that MPM has achieved revenue and earnings before interest, taxes, depreciation and amortisation (ebitda) levels of $125 million and $29 million, respectively, for two consecutive years from FY2023 to FY2024, beating its previous revenue and earnings before interest and taxes (ebit) FY2013 to FY2014 peaks of $113 million and $24 million, respectively.

 

&ldquo Recovery in the dayrates and utilisation of its O& G services vessels, as well as fleet expansion to cater to offshore wind projects, have been the key drivers, in our view.&rdquo

 

With the group&rsquo s net cash position of $35.8 million as at September, Kande and Lim note that MPM could add three more crew transfer vessels (CTVs) by FY2027, consequently forecasting a revenue growth of 6% to 19% for the FY2025 to FY2027.

 

Due to the tight global vessel supply environment, MPM&rsquo s gross margins have expanded to 39.3% in FY2024. On this, the analysts write: &ldquo We opine that a favourable revenue mix towards high-value repair work should lift margins to 41% by FY2027, offsetting the higher labour costs amid a shortage of workers. We estimate core net profit growth of 2% to 33% over FY2025-FY2027.&rdquo

 

They conclude: &ldquo On an ex-net cash basis, the stock trades at an undemanding 4.8 times FY2026 price-to-equity ratio (P/E).&rdquo

 

Meanwhile, Kande and Lim expect contributions from Pacific Radiance&rsquo s three recently-activated vessels to come in FY2025. They write: &ldquo We forecast revenue growth of 34 and 27% in the FY2024 and FY2025 respectively, driven by increased lease and time-charter revenues from the reactivated vessels, and higher shipyard revenues as the group targets more complex repair jobs.&rdquo

 

Pacific Radiance has also expanded into East Asia&rsquo s offshore wind market, with the group constructing one CTV to join its current fleet of three CTVs by early-FY2025. Construction on two newbuild CTVs have also begun, which are scheduled to be ready by May and August FY2025.

 

Meanwhile, the group restructured its US$576 million ($777.1 million) outstanding debt in 2022 and used proceeds from its rights issue in 1HFY2024 to repay all remaining loans, leading to a net cash position of US$23 million as of June.

 

On this, the analysts write: &ldquo For FY2024F/FY2025, we expect lower finance costs and higher contribution from joint-ventures (JVs) to support a core net profit turnaround in FY2025 to US$3 million. We think Pacific Radiance has the capacity to build one more CTV by FY2026, which could bring further upside of around S$1.5 million to our FY2026 net profit forecast of US$2.7 million.&rdquo

 

CGSI also likes the company for its position to benefit from the tight global vessel supply environment in both O& G and offshore wind. Its improving financial position and growing exposure to renewables could help alleviate ESG concerns when raising financing for fleet expansion, they add.

 

The analysts also highlight that following the 2014 oil price collapse, O& G industry consolidation and restricted financing have slowed fleet growth. 

 

&ldquo With the number of active yards at a 24-year low globally, shipyards are well-positioned to command higher rates for OSV repairs work and order prices for newbuild vessels, in our view.&rdquo

 

As a result, Kande and Lim have kept their &ldquo overweight&rdquo call on the offshore and marine (O& M) sector, believing OSV charters and yard owners to gain from tailwinds in the O& G and offshore wind industries. 

 

Sector downside risks include the cancellations of offshore wind projects and lower-than-expected global oil production impacting vessel utilisation, as well as a surge in newbuild vessels pressuring dayrates.