Brokers' take: RHB initiates 'buy' on Marco Polo Marine on forecast renewable energy turnaround

RHB has initiated coverage on Marco Polo Marine with a "buy" call and a target price of 4.1 Singapore cents, on an expected turnaround on renewable energy.

In a Wednesday report, RHB analyst Jarick Seet said that Marco Polo's diversification into servicing the renewable energy sector is expected to bear fruit in the next one or two years, with the oil and gas sector still the group's major source of income in the meantime.

"We expect to see an earnings rebound, and the group to record a turnaround back to strong profitability in the next two to three years," he said.

Renewable energy will be a significant growth area for Marco Polo, especially with the influx of investors entering the space. The group has previously secured shipbuilding contracts from Singapore Aquaculture Technologies (SAT) to construct two smart fish farms, which are set to complete by end-FY2021, he said.

He also noted that, as at H1 2021, 20 per cent of Marco Polo's utilised vessels are already working on wind farm projects in Taiwan, where it has an edge - its vessels are built outside of China, a key requirement, less than 12 years old, a rarity for non-Chinese ships in the region, and more than well-equipped, thanks to stringent requirements for offshore oil and gas activities.

Mr Seet believes that Marco Polo will expand its Taiwan operations, likely looking to double its chartering fleet in this area by end-December.

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"In addition, we are confident that it will likely look towards growing its chartering fleet once the utilisation rate exceeds 85 per cent. It will also likely aim to have at least 50 per cent of the fleet serving the renewable energy sector," he said, adding that its chartering fleet utilisation rate is likely to rise to 80 per cent by H2 2022, from 60 per cent currently.

He also observed a boost from surging demand for shipbuilding, repair and upgrades. The resumption of oil and gas activities and its foray into renewable energy has brought about strong growth in Marco Polo's shipyard division, with its shipbuilding and repair revenue jumping 34.5 per cent year on year (y-o-y) in H1 FY2021.

This is expected to extend into FY2022, and Marco Polo aims to expand and increase the capacity of its Dry Dock 1 to cope with the demand spike.

Furthermore, WTI (West Texas Intermediate) crude price surged to a high of US$72 per barrel in June 2021 as the world recovered from the pandemic. Covid-19 had hampered the recovery of the oil and gas industry, which had been on the way back up after oil prices crashed from mid-2014 to 2016. This "rare net cash turnaround story" will be positive for Marco Polo, Mr Seet said.

At the same time, a construction sector recovery is also expected to be beneficial for Marco Polo, which has a fleet of 24 tug and barge vessels, and offers customised solutions for bulk handling and transportation chartering and transhipment services.

For a few months in 2020, the utilisation rate of these equipment fell close to zero per cent as construction ground to a halt, before climbing to the current 50 to 60 per cent as vaccines were rolled out and the sector recovered.

RHB projects that rates will improve to hit 70 to 80 per cent by the end of 2022, as rates per vessel also recover to an average of S$50,000 to S$60,000 a month, from S$40,000 at present.

The group in FY2018 raised S$60 million from strategic investors and underwent a debt restructuring exercise that gave it a clean slate, and has maintained a strong financial position since.

"Marco Polo is one of the rare few listed oil and gas service providers to emerge from the oil and gas (O&G) crisis and the Covid-19 pandemic with no debt and a net cash balance sheet," said Mr Seet. "It is one of a very small handful of O&G service providers listed in Singapore that has net cash."

Marco Polo Marine's mainboard-listed stock rose 3.5 per cent or 0.1 Singapore cent to finish Wednesday at three cents. Nearly 159 million shares changed hands, making it the most heavily traded counter by volume for the day.