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MERCATOR LINES LTD (MLL)
PRICE: RS.24 RECOMMENDATION: BUY
TARGET PRICE: RS.38 FY13E P/E: 15.7X
Subdued Operational performance
MLL reported weak operational performance in the quarter with revenues
growing 16% YoY but declining 2% QoQ to Rs 7.8 bn. The coal segment
(mining and trading) reported revenues of Rs 4.3 bn growing more than
50% YoY but declining 9% QoQ. The operating margins for the coal
segment declined to 8.17% (vs. 7.10% YoY and 9.41% QoQ). In the shipping
segment, the Singapore subsidiary reported PAT of USD 1.7 mn (falling 70%
YoY) while the Indian shipping business reported loss of Rs 295 mn. The
bulk shipping segment continues to be weak and expected to remain weak
for the next 2 calendar years. We believe the IPO of Oorja Holdings (100%
coal subsidiary), which was earlier expected by end of FY12E to now come
only in FY13E. We are reducing the target price to reflect the fall in shipping
asset prices by 5 to 10 % in the last 3 months and postponement of IPO of
Oorja Holding. We reiterate Buy with a reduced TP of Rs 38 for the stock.
n Mercator Lines Ltd (MLL) reported subdued numbers with consolidated revenues
increasing ~16% YoY but declining 2% QoQ to Rs 7.8 bn amidst weak shipping
market globally and stagnant shipping fleet for the company.
n Revenues of the coal segment grew more than 50% YoY but declined 9% QoQ.
This was primarily due to monsoon season in India where most of the customers
of MLL are based out of. Even the operating margins for the segment declined to
8.17% (vs. 7.10% YoY and 9.41% QoQ).
n Revenues of offshore segment grew by ~40% YoY to Rs 505 mn in the quarter.
In the offshore segmen the company currently operates a Floating Storage and
Offloading unit (FSO) and a Floating Production Unit (FPU) both deployed on long
term contracts.
n Conolidated EBITDA was at Rs 1,498 million translating into EBIDTA margin of
19.18%. The consolidated EBIDTA margin of the company has fallen primarily
due to increased share of low margin coal business in the overall revenues of the
company.
n The Shipping division reported an EBIT margin of ~2 %, coal division reported an
EBIT margin of ~8%, while offshore reported an EBIT margin of 27%.
n The company has not booked any profit on sale of ships (PSS) in the current
quarter.
n Interest component has remained flat at Rs 473 million in the current quarter
(previous year ~ Rs 472 mn). The debt for the company has also remained flat at
Rs 34 bn in the current quarter (Rs 34 bn in the previous year).
n As a result the adjusted net profit of the company has declined to Rs 67 million.
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 - Value accretive, however IPO 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.
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 slow in shipping business.
Offshore business
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 1,500 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) estimated at Rs 38 per share
We estimate new NAV of Rs 38 for MLL's shipping assets. Both dry and tanker
market has fallen about 5% to 25 % YoY in the quarter, the NAV for MLL has fallen
QoQ from Rs 42 (in June 2011).
Valuation - We value MLL at Rs 38 per share
We do SOTP valuation for MLL. We value the Shipping (including dredging business)
at 40% discount to NAV (higher discount due to weak outlook) which is Rs.23 per
share (NAV = Rs.38 per share), the mining business at 3.0x FY13 EV/EBIDTA (discount
to global average) and low margin coal trading at 2x FY12 EV/EBIDTA which
is Rs.11 per share and the offshore business at 6.0 x FY13 EV/EBIDTA (20% discount
to global average) which is Rs 5 per share. We reiterate BUY with a reduced price
target of Rs 38.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MERCATOR LINES LTD (MLL)
PRICE: RS.24 RECOMMENDATION: BUY
TARGET PRICE: RS.38 FY13E P/E: 15.7X
Subdued Operational performance
MLL reported weak operational performance in the quarter with revenues
growing 16% YoY but declining 2% QoQ to Rs 7.8 bn. The coal segment
(mining and trading) reported revenues of Rs 4.3 bn growing more than
50% YoY but declining 9% QoQ. The operating margins for the coal
segment declined to 8.17% (vs. 7.10% YoY and 9.41% QoQ). In the shipping
segment, the Singapore subsidiary reported PAT of USD 1.7 mn (falling 70%
YoY) while the Indian shipping business reported loss of Rs 295 mn. The
bulk shipping segment continues to be weak and expected to remain weak
for the next 2 calendar years. We believe the IPO of Oorja Holdings (100%
coal subsidiary), which was earlier expected by end of FY12E to now come
only in FY13E. We are reducing the target price to reflect the fall in shipping
asset prices by 5 to 10 % in the last 3 months and postponement of IPO of
Oorja Holding. We reiterate Buy with a reduced TP of Rs 38 for the stock.
n Mercator Lines Ltd (MLL) reported subdued numbers with consolidated revenues
increasing ~16% YoY but declining 2% QoQ to Rs 7.8 bn amidst weak shipping
market globally and stagnant shipping fleet for the company.
n Revenues of the coal segment grew more than 50% YoY but declined 9% QoQ.
This was primarily due to monsoon season in India where most of the customers
of MLL are based out of. Even the operating margins for the segment declined to
8.17% (vs. 7.10% YoY and 9.41% QoQ).
n Revenues of offshore segment grew by ~40% YoY to Rs 505 mn in the quarter.
In the offshore segmen the company currently operates a Floating Storage and
Offloading unit (FSO) and a Floating Production Unit (FPU) both deployed on long
term contracts.
n Conolidated EBITDA was at Rs 1,498 million translating into EBIDTA margin of
19.18%. The consolidated EBIDTA margin of the company has fallen primarily
due to increased share of low margin coal business in the overall revenues of the
company.
n The Shipping division reported an EBIT margin of ~2 %, coal division reported an
EBIT margin of ~8%, while offshore reported an EBIT margin of 27%.
n The company has not booked any profit on sale of ships (PSS) in the current
quarter.
n Interest component has remained flat at Rs 473 million in the current quarter
(previous year ~ Rs 472 mn). The debt for the company has also remained flat at
Rs 34 bn in the current quarter (Rs 34 bn in the previous year).
n As a result the adjusted net profit of the company has declined to Rs 67 million.
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 - Value accretive, however IPO 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.
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 slow in shipping business.
Offshore business
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 1,500 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) estimated at Rs 38 per share
We estimate new NAV of Rs 38 for MLL's shipping assets. Both dry and tanker
market has fallen about 5% to 25 % YoY in the quarter, the NAV for MLL has fallen
QoQ from Rs 42 (in June 2011).
Valuation - We value MLL at Rs 38 per share
We do SOTP valuation for MLL. We value the Shipping (including dredging business)
at 40% discount to NAV (higher discount due to weak outlook) which is Rs.23 per
share (NAV = Rs.38 per share), the mining business at 3.0x FY13 EV/EBIDTA (discount
to global average) and low margin coal trading at 2x FY12 EV/EBIDTA which
is Rs.11 per share and the offshore business at 6.0 x FY13 EV/EBIDTA (20% discount
to global average) which is Rs 5 per share. We reiterate BUY with a reduced price
target of Rs 38.
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