Speculating on 1) Turnaround of FSU business and 2) Better perform in Oil tanker business.
PRM operates oil-related businesses 1) Oil tanker logistic both domestic route and international route 2) Floating storage unit service (Oil and petrochemical products stored in vessel competes with onshore tank) 3) Floating storage and offshore exploration service which mainly supports and accommodates oil platforms in the gulf of Thailand and the last business unit is ship management services. PRM listed in Stock exchange of Thailand (SET) on 14 September 2017 with IPO price at 8 baht/share. Stock price went to reach summit in October on the same year at 14 baht/share but unfortunately, its price continuously collapsed to the lowest point at 5 baht/share in the beginning of 2019. We examine the reasons of falling in stock price and came to the conclusion that 1) loss contribution from international route of Oil tanker business due to a significant decreasing of international freight rate (Aframax rate from Indonesia to Japan) from around 20,000 USD/day to 8,000 USD/day thus PRM reported gross loss of oil tanker business in 2017 and 2018 at -121 million baht and -21 million baht, respectively. 2) miscommunicated about losing clients in FSU business which previous thought of investor that FSU was rock solid business and because this unit is high operating leverage, small declined in utilization rate would cut off half of gross profit in 2018. Gross profit of FSU in 2017 and 2018 was 858 million baht and 470 million baht, respectively.
But in 2019, the situation has changed and we speculate PRM to outperform in this year based on these following ideas.
- Oil Tanker business: we expect to see high growth in domestic route services relative to 2018 due to 1) PRM plans to invest 6 new vessels in 2019 which 3 of them are replacement of old vessels and 3 vessels are fleet expansion. All new vessels will be received within first half of 2019. Currently, Domestic vessel contributed revenue per vessel around 80 million baht each year. We surmise that 3 new vessels will generate revenue at least 120 million baht in 2019 and the contract has already secured.
- Oil Tanker business: PRM will recognize full year basis of Big Sea which was acquired in 2nd half of 2018. After Big Sea acquisition, PRM’s market share increased from 32.9% in 2017 to 49.3% in 2018 for oil tanker domestic route.
- FSU business: the company expects to expand another 2 VLCC vessels to capture new demand from IMO standard which will enforce a new 0.5% global Sulphur cap on bunker fuel from current 3.5% limit in Jan 2020. PRM will be a beneficiary from increasing of storage demand for low Sulphur components (0.1%-0.5%) to blend with high Sulphur fuel in order to comply with new standard in 2020.
- FSU business: Adjusting contract price of each vessel to increase by 10-20% to 2016-2017 level where revenue per vessel was round 400-450 million baht per year compares to 310 million baht per year in 2018. Declining in contract price due to intense competition in the market which mainly from Chinese operator that dump the price down from losing client as well in last year. In order to maintain the competitiveness PRM had to reduce the price for the client to the market price. But In 2019, new demand from IMO revises supply and demand in floating storage market to favor the supply side which the company expect to adjust contract price back to 2016-17 level. They claim that clients are willing to take the new price.
Oil Tanker (Trading business)
- Oil Tanker services both in Domestic route via Small size vessel (<10,000 DWT) and International route via Aframax vessel (100,000 DWT). Transportation via Vessel has lowest cost compares to other approaches as such Truck, Pipeline and train) in term of IRR.
- Major client: PTT/ Shell/ Chevron/ESSO / Thai Oil / BCP / PTTGC/ IRPC /Exxon Mobil/ SPRC
- Domestic route: From refinery to southern part of Thailand (Surat Thani, Songkla, Phuket etc.)
- International Route to Cambodia/ Singapore/ Vietnam/ Malaysia / China / Indonesia/ Australia
- Logistic Product: Diesel/ Benzene / Jet A1/ Naphtha other
- 26 vessels for domestic route which 12 vessels were received from Big sea acquisition in 2018. Total capacity of company own domestic route is 76,178 DWT.
- 2 vessels of Aframax size with total capacity of 211,531 DWT.
- Domestic route: Cost plus (Project Base) – PTT has exact calculation approach which factors in distance/ Bunker price / Oil price.
- International route: Time charter and spot rate.
- Big Sea acquisition in 2018
- PRM acquired Big Sea a second largest oil tanker which is the provider of domestic marine transportation of petroleum product for 70% interests by purchasing at 1,400 million baht (Expected total company value at 2,000 million baht). In addition, the company will be able to purchase remaining stake over the next 3 years by consideration from its future performance (10% each year).
- PRM will purchase another 10% for 360 million baht in 2019 (expected total company value at 3,600 million baht).
- Big Sea Fleet; 12 small size vessels – Totaling of 31,744 DWT compares to PRM’s fleet of 44,434 DWT or 14 vessels.
- After Big Sea acquisition, PRM’s market share increased from 32.9% in 2017 to 49.3% in 2018 for oil tanker domestic route.
Domestic route market share
- Whether oil tanker performance will be good as expected or not may depend on international performance due to profitability of domestic route is stable from contract of affreightment which is cost-plus contract but international route it’s different. International route contract will rely on world scale rate (Aframax freight rate) both Time charter contract and Spot contract. As you can see the international route performance is volatile so as freight rate. To be conservative we expect international route will continuously contribute loss like 2018. The company said breakeven freight rate for international route is around 18,000 – 20,000 USD/day.
Floating Storage Unit (FSU business)
- FSU is offshore oil and chemical product storage in VLCC vessel. FSU is substitution of onshore tank terminal due to less regulation control, less investment, lower port expense cost and more flexibility. There are 5 VLCCs in a fleet that anchoring at Tanjung Pelepas in Malaysia and 1 VLCC in Sri Chang – Chonburi which Joint venture with Bangchank Corporation (BCP). In addition to storage service, PRM also provides auxiliary services such as air agitation, Heating, Blending and Intertank transfer.
- Contract term: Charter contract (partial or full charter) term of contract 1-2 years
- Major Clients: Mercuria Energy Trading Pte. Ltd. /BP Singapore Pte. Ltd / Mitsui & Co. (Asia Pacific) Pte. Ltd / SK Energy Co., Ltd. /Uniper Energy / BCP
- Major cost: Depreciation, Ship management and crew expense
- In 2017-2018, FSU business has deteriorated due to declining in utilization rate of fleet from losing client after contract expired and declining of contract price from intense competition by dumping selling price of Chinese operators in neighboring area. After losing client in 2017, PRM sold 2 VLCC vessels in Jan-18 and July-18 in order to manage operating cost and avoid dry docking expense of empty vessels in 2019-2020.
- We expect turnaround in FSU business from fleet expansion for 2 VLCC vessels to capture new demand from IMO standard in 2020. New VLCC vessels named Aquarious star and Crystal star that will be received in April and May, respectively.
New IMO standard
- International Marine Organization (IMO) Standard implement in 2020
- IMO will enforce a new 0.5% global Sulphur cap on bunker fuel from current 3.5% limit in Jan 2020. PRM will be a beneficiary from increasing of storage demand for low Sulphur components or ULSFO (0.1%-0.5%) to blend with high Sulphur fuel in order to comply with new standard in 2020.
- The transition from 3.5% to 0.5% is not easy and it needs for huge logistics involving transport between refineries, storage and delivery vessels and the massive work for ship to clean out fuel systems to avoid Sulphur contamination.
- At the present, Shipping is consuming around 3.2 million bpd of HFO (Heavy fuel oil) and 0.7-0.8 bpd of MGO (Marine Gas Oil) has and from 2020, this proportion will change to 0.7 million bpd of HFO and 3.4 m bpd of MGO.
- There are 3 options for ship operators
- FSU business: Adjusting contract price of each vessel to increase by 10-20% to 2016-2017 level where revenue per vessel was round 400-450 million baht compares to 310 million baht in 2018. In 2019, new demand from IMO revises supply and demand in floating storage market to favor the supply side which the company expect to adjust contract price back to 2016-17 level. They claim that clients are willing to take the new price and will start new contract price in April-2019.
- In our opinion, adjusting contract price will be a significant key risk to future performance in 2019 due to we can’t find any external information to determine whether PRM is capable to raise the contract price as company said.
Company report on FSU business
- Floating storage and offshore exploration service (FSO) which mainly supports and accommodates oil platforms in the gulf of Thailand. PTTEP is a main client of FSO business.
- Ship management services: PRM provides crew on board and fleet management, Crew training, Vessel maintenance etc.
- Oil tanker: Although contract price of domestic route is cost plus contract but we think bunker expense will rise around 10% from new IMO standard in 2020 which PRM may not adjust contract accordingly to increasing of bunker price. This mismatching of adjusting contract price and incremental expense from IMO standard will undermine gross profit margin of Domestic route.
- The fluctuation of world scale rate (Aframax freight rate) will make international operation is unpredictable and further contribute loss in 2019. We hope that international route will only report mild loss.
- FSU business: If PRM can’t raise the contract price as they expected, this will significantly affect the street valuation. It’s likely to bring stock price down to previous level.
- FSU business: Risk of losing client as they experienced in 2017 due to FSU contract has term only 1-2 year and mostly is 1-year contract. Declining in utilization rate of the fleet will vastly impact their profitability index.
1q19 Financial performance update
- PRM reported net profit in 1q19 at 221 mb grew by 56% yoy and 36% qoq as expected mainly driven from improvement of gross profit margin from 23.6% in 1q18 and 21.8% in 4q18 to 29% in 1q19 and declining of SG&A 19% yoy due to lower of consultant fee from disposal vessel (FSU) in 1q18.
- Service revenue increased by 16.7% yoy or 170 mb compares to 1q18 due to
- Oil tanker revenue grew 47% yoy or 204 mb from revenue recognition of Big Sea that acquired in 3q18 around 150 mb and there are 2 new vessels added in 1q19 which first 3,000 DWT was on duty in 1q19 and another 5,000 DWT of Big Sea fleet will be recognized in 2q19.
- FSU revenue declined -15% yoy or -58 mb due to lower no. of VLCC from 5 vessels in 1q18 to 4 vessels in 1q19.
- Offshore supporting revenue increased by 40% yoy due to AWB and FSO vessel were fully occupied for 84 days in 1q19 compared to 13 days in 1q18 and avg. contract price was improved as well
- Gross profit in 1q19 increased by 43% yoy mainly came from
- International route oil tanker has changed contract from Spot charter to time charter which will stabilize revenue from freight fluctuation and reducing fuel cost burden. International route business turned gross profit in to positive around 10 mb from loss of -5.7 mb in 1q18
- Domestic oil tanker reported gross profit growth around 138% yoy due to margin improvement from 12% to 20% came from better utilized fleet and revenue recognition of Big sea.
- FSU has improved gross profit margin from 35% in 1q18 to 42.6% in 1q19 from increasing of utilization rate to 100% in 1q19 which came from new customers (Refinery and Asphalt company).
- There will be 2 VLCC vessels of FSU business that will online in May and June 2019 to serve demand of new standard IMO (lower sulfur in bunker fuel oil from 3.5% to 0.5% in 2020). These vessels will be storage of ultra-low sulfur fuel oil and blending with High sulfur fuel oil to comply with new regulation.
- FSU contract price will be gradually adjusted in April-2019 which we believe it will be the profit growth driver in 2q19.