CGS International has rated the offshore and marine (O&M) sector “overweight” after observing that the market for O&M vessels is facing a shortage. It has singled out Marco Polo Marine and Pacific Radiance , both of which operate yards and charter vessels, as the stocks to ride the industry upturn.
In their report on Dec 12, analysts Meghana Kande and Lim Siew Khee point out that with end demand coming from offshore energy exploration and production, charter rates for support vessels have increased by as much as 145% since 2021 following the multi-year downturn from 2014. “With the number of active yards at a 24-year low globally, shipyards are well-positioned to command higher rates for offshore support vessel repair works and order prices for newbuild vessels, in our view.”
Since the start of the year, average offshore rig utilisation, a proxy for oil and gas (O&G) production activity, remains high at 80%, Kande and Lim point out. This is forecast 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.
In their Dec 12 report, the analysts note that both Marco Polo Marine and Pacific Radiance are also poised to benefit from growing repair and construction contracts as yard owners. The analysts have initiated “add” on both stocks, along with a target price of 8 cents for Marco Polo Marine and 7 cents for Pacific Radiance.
Kande and Lim note that Marco Polo Marine has achieved revenue and ebitda levels of $125 million and $29 million, respectively, for FY2023 and FY2024 consecutive consecutively, beating its previous revenue and earnings before interest and taxes (ebit) FY2013 to FY2014 peaks of $113 million and $24 million, respectively. “Recovery in the day rates 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.”
With its net cash position of $35.8 million as of September, Kande and Lim estimate that Marco Polo Marine could add three more crew transfer vessels (CTVs) by FY2027. Therefore, they forecast revenue growth of 6% to 19% from FY2025 to FY2027.
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Due to the tight global vessel supply environment, Marco Polo Marine’s gross margins have expanded to 39.3% in FY2024. “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,” the analysts write.
They note that the counter trades at just 6 times FY2026 earnings, which is a one-third discount to its global peers. If its net cash of some $36 million is disregarded, Marco Polo Marine is trading at just 4.8x FY2026 earnings. Their target price of 8 cents is based on FY2026 earnings multiple of 9x, which is in line with global peers.
Meanwhile, Kande and Lim expect contributions from Pacific Radiance’s three recently activated vessels to begin in FY2025. They are projecting revenue growth of 34% in the current FY2024 and 27% in the following FY2025, driven by increased lease and time-charter revenues from the reactivated vessels and higher shipyard revenues as the group targets more complex repair jobs.
Pacific Radiance has also expanded into East Asia’s offshore wind market. It is in the midst of building a CTV to join its current fleet of three by early FY2025. Construction on two new CTVs has also begun, and they are scheduled to be ready by May and August FY2025.
Pacific Radiance has also 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.
Kande and Lim estimate that Pacific Radiance will be able to lower its finance costs. Coupled with higher contributions from joint ventures (JVs), the company can expect to turn around and report a core net profit of US$3 million in FY2025. “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,” they add.
The CGSI analysts add that Pacific Radiance’s improving financial position and growing exposure to renewables could help alleviate ESG concerns when raising financing for fleet expansion. Their target price of 7 cents for Pacific Radiance is based on 1x FY2025 P/BV. For the sector, possible downside risks include the cancellation of offshore wind projects, lower-than-expected global oil production impacting vessel utilisation and a surge in new-build vessels pressuring day rates.
