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MERCATOR LINES LTD
PRICE: RS.27 RECOMMENDATION: BUY
TARGET PRICE: RS.48 FY12E P/E: 8.7X
Listing of Oorja Holding (coal business) providing some momentum
to the stock, however IPO may get delayed
Mercator Lines Ltd - a shipping company - has diversified into coal mining
business in a big way to hedge the company against the cyclical shipping
business. We estimate coal (mining + trading) to almost contribute 60% of
the revenue for the company by FY13E. Now MLL is looking forward to get
the shipping business listed in Singapore in the next 2 quarters. We believe
the listing of the coal business (under Oorja holding) would be value
accretive for MLL. However, due to poor market conditions, the listing of
Oorja holding may get deferred to the next financial year (FY13E) which can
be a dampener for the company which is already struggling with poor
shipping business.
Company to make announcement of an acquisition of new mine
The company had acquired a Greenfield mine in Batua (Kalimanthan) with a proven
reserve of 30 mn tonnes, formal announcement of which would be out in next few
days. This mine would start commercial production from Q4FY12. Our current estimates
factor this new acquisition.
Coal business to play a significant role
In FY11, coal mining and trading constituted more than ~45% of the top line and
around ~50% of the PBT. Going forward MLL would primarily concentrate on the
coal business which would act as a hedge for the company against the cyclical shipping
business.
Coal business - Performance of Oorja Holding Pvt Limited (OHPL)
MLL's coal business is under its 100 % subsidiary OHPL. This company acquired coal
mines in Indonesia and Mozambique in 2007. In Indonesia, OHPL owns 100% in
two mines in Petangis (proven reserve of 15 mn tonnes) and 50% in mines in
Kalimantan (proven reserve of 30 mn tonnes). Coal business picked up significantly
in FY11. The coal mining and trading business generated revenue of Rs 13.4 bn and
EBIT ~ Rs 1 bn in FY11
Coal mining and trading business is a fast growing but a low Ebidta margin business
for the company.
Listing of Oorja Holdings on the anvil - Value accretive, may get
delayed
MLL is looking forward to get the 100% mining subsidiary listed (Oorja holding ltd)
which would lead to significant value unlocking for the parent company. We believe
the listing of Oorja holding would be at average multiple of global mining cum trading
companies and may provide an upside of ~5 to 10% from the current levels.
MLL may get the subsidiary listed in Q4FY12E. We estimate the equity value of
Oorja holding at ~ Rs 4.2 bn which is 4.5 x EV/EBIDTA FY12E. However, due to poor
market conditions, the listing of Oorja holding may get deferred to the next financial
year (FY13E) which can be a dampener for the company which is already struggling
with weak shipping business.
Offshore business
In the previous financial year, the company sold its only rig to GESCO effective February
end 2011 for $179 mn (book value $183 mn). Part of these proceeds the company
may have utilized to retire the debt associated with the rig of ~ $130 mn. This
has helped the company to bring down the debt burden and interests cost substantially.
The company's net debt currently stands at Rs 30 bn (down from Rs 36 bn in
Dec 2010). This will also help capex keeping the net debt to equity in healthy state.
In the offshore segment the company currently operates the following equipment:
n Floating Storage and Offloading unit (FSO) - deployed on long term contract
to British Gas at US$ 50,000 per day.
n Floating Production Unit (FPU) - a combination of Mobile Offshore Production
Unit (MOPU) and a Floating Storage and Offloading Unit (FSO) which is on long
term contract with a U.K. based company having its operations in Nigeria. This
FPU is designed to process 30,000 barrels of oil per day & will be upgraded to
process an additional 20,000 barrels per day in phase II of the project (by CY11
end).
Current shipping fleet
In shipping business company currently owns 4 tankers (total dwt = 0.59 mn Dwt), 3
Medium Range product carriers (total dwt = 0.13 mn dwt), 15 bulk carriers (total
dwt = 1.3 mn dwt) and 4 Trailer Suction Hopper Dredgers having capacities ranging
from 4,500 m3 to 7,000 m3. The company has placed these ships partly on medium
term to long term contracts and partly on spot basis in the ratio of 45:55.
Tough phase for shipping business continues - Supply side pressure
continues
In the dry market, the BDI is at 1,600 points level mark with weak expectations for
the forthcoming days. Even the tanker market is very soft with oversupply of ships
and minimum tonnage available. We are not bullish on the shipping business going
forward primarily due to oversupply of ships in the bulk segment (net supply of 7.0%
per annum) and even in the tanker segment (net supply of 3.2% per annum) over
CY11E to CY14E.
Consolidated Capex - company to invest primarily in mining business
Going forward the company would be primarily concentrating and investing in the
mining business. The management indicated that the investment would be ~Rs.2.5
bn per annum over FY12E-FY14E. Such investments would give a fillip to the mining
and trading volumes for the company. This would act as a hedge for the company
against the cyclical shipping business.
Net Asset Value (NAV)
Our estimated NAV is Rs 42 for MLL's shipping assets. The estimated NAV of the
company has fallen from Rs 45 QoQ.
Valuation - We continue to value MLL at Rs 48 per share
We do SOTP valuation for MLL. We value the Shipping (including dredging business)
at 30% discount to NAV or replacement value which is Rs.31 per share (NAV =
Rs.42 per share), the mining business at 4.0x FY12 EV/EBIDTA (discount to global
average) and low margin coal trading at 2x FY12 EV/EBIDTA which is Rs.12 per
share and the offshore business at 6.0 x FY12 EV/EBIDTA (20% discount to global
average) which is Rs 5 per share. We reiterate BUY with an unchanged price target
of Rs 48. We are currently not changing the price target for the company and would
wait and see the developments in listing of Oorja Holding, which if deferred would
lead to reduction in target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MERCATOR LINES LTD
PRICE: RS.27 RECOMMENDATION: BUY
TARGET PRICE: RS.48 FY12E P/E: 8.7X
Listing of Oorja Holding (coal business) providing some momentum
to the stock, however IPO may get delayed
Mercator Lines Ltd - a shipping company - has diversified into coal mining
business in a big way to hedge the company against the cyclical shipping
business. We estimate coal (mining + trading) to almost contribute 60% of
the revenue for the company by FY13E. Now MLL is looking forward to get
the shipping business listed in Singapore in the next 2 quarters. We believe
the listing of the coal business (under Oorja holding) would be value
accretive for MLL. However, due to poor market conditions, the listing of
Oorja holding may get deferred to the next financial year (FY13E) which can
be a dampener for the company which is already struggling with poor
shipping business.
Company to make announcement of an acquisition of new mine
The company had acquired a Greenfield mine in Batua (Kalimanthan) with a proven
reserve of 30 mn tonnes, formal announcement of which would be out in next few
days. This mine would start commercial production from Q4FY12. Our current estimates
factor this new acquisition.
Coal business to play a significant role
In FY11, coal mining and trading constituted more than ~45% of the top line and
around ~50% of the PBT. Going forward MLL would primarily concentrate on the
coal business which would act as a hedge for the company against the cyclical shipping
business.
Coal business - Performance of Oorja Holding Pvt Limited (OHPL)
MLL's coal business is under its 100 % subsidiary OHPL. This company acquired coal
mines in Indonesia and Mozambique in 2007. In Indonesia, OHPL owns 100% in
two mines in Petangis (proven reserve of 15 mn tonnes) and 50% in mines in
Kalimantan (proven reserve of 30 mn tonnes). Coal business picked up significantly
in FY11. The coal mining and trading business generated revenue of Rs 13.4 bn and
EBIT ~ Rs 1 bn in FY11
Coal mining and trading business is a fast growing but a low Ebidta margin business
for the company.
Listing of Oorja Holdings on the anvil - Value accretive, may get
delayed
MLL is looking forward to get the 100% mining subsidiary listed (Oorja holding ltd)
which would lead to significant value unlocking for the parent company. We believe
the listing of Oorja holding would be at average multiple of global mining cum trading
companies and may provide an upside of ~5 to 10% from the current levels.
MLL may get the subsidiary listed in Q4FY12E. We estimate the equity value of
Oorja holding at ~ Rs 4.2 bn which is 4.5 x EV/EBIDTA FY12E. However, due to poor
market conditions, the listing of Oorja holding may get deferred to the next financial
year (FY13E) which can be a dampener for the company which is already struggling
with weak shipping business.
Offshore business
In the previous financial year, the company sold its only rig to GESCO effective February
end 2011 for $179 mn (book value $183 mn). Part of these proceeds the company
may have utilized to retire the debt associated with the rig of ~ $130 mn. This
has helped the company to bring down the debt burden and interests cost substantially.
The company's net debt currently stands at Rs 30 bn (down from Rs 36 bn in
Dec 2010). This will also help capex keeping the net debt to equity in healthy state.
In the offshore segment the company currently operates the following equipment:
n Floating Storage and Offloading unit (FSO) - deployed on long term contract
to British Gas at US$ 50,000 per day.
n Floating Production Unit (FPU) - a combination of Mobile Offshore Production
Unit (MOPU) and a Floating Storage and Offloading Unit (FSO) which is on long
term contract with a U.K. based company having its operations in Nigeria. This
FPU is designed to process 30,000 barrels of oil per day & will be upgraded to
process an additional 20,000 barrels per day in phase II of the project (by CY11
end).
Current shipping fleet
In shipping business company currently owns 4 tankers (total dwt = 0.59 mn Dwt), 3
Medium Range product carriers (total dwt = 0.13 mn dwt), 15 bulk carriers (total
dwt = 1.3 mn dwt) and 4 Trailer Suction Hopper Dredgers having capacities ranging
from 4,500 m3 to 7,000 m3. The company has placed these ships partly on medium
term to long term contracts and partly on spot basis in the ratio of 45:55.
Tough phase for shipping business continues - Supply side pressure
continues
In the dry market, the BDI is at 1,600 points level mark with weak expectations for
the forthcoming days. Even the tanker market is very soft with oversupply of ships
and minimum tonnage available. We are not bullish on the shipping business going
forward primarily due to oversupply of ships in the bulk segment (net supply of 7.0%
per annum) and even in the tanker segment (net supply of 3.2% per annum) over
CY11E to CY14E.
Consolidated Capex - company to invest primarily in mining business
Going forward the company would be primarily concentrating and investing in the
mining business. The management indicated that the investment would be ~Rs.2.5
bn per annum over FY12E-FY14E. Such investments would give a fillip to the mining
and trading volumes for the company. This would act as a hedge for the company
against the cyclical shipping business.
Net Asset Value (NAV)
Our estimated NAV is Rs 42 for MLL's shipping assets. The estimated NAV of the
company has fallen from Rs 45 QoQ.
Valuation - We continue to value MLL at Rs 48 per share
We do SOTP valuation for MLL. We value the Shipping (including dredging business)
at 30% discount to NAV or replacement value which is Rs.31 per share (NAV =
Rs.42 per share), the mining business at 4.0x FY12 EV/EBIDTA (discount to global
average) and low margin coal trading at 2x FY12 EV/EBIDTA which is Rs.12 per
share and the offshore business at 6.0 x FY12 EV/EBIDTA (20% discount to global
average) which is Rs 5 per share. We reiterate BUY with an unchanged price target
of Rs 48. We are currently not changing the price target for the company and would
wait and see the developments in listing of Oorja Holding, which if deferred would
lead to reduction in target price.
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