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NRA Capital Pte Ltd

Written by: NRA Team

Tuesday 5 May 2015

Atlantic Navigation - 1Q15 results briefing

Staying afloat in troubled waters

High utilization of owned-fleet keeps margins buoyant

Operating in the relatively stable Middle East offshore sector, Atlantic Navigation Holdings (ANH) saw revenue and net profit growth yoy for 1Q15 despite the poor global outlook for offshore support vessels. Its 1Q15 revenue increase 22.4% yoy, going from US$11.2m to US$13.7m, while gross profit margins also improved, achieving 44.7% gross profit margin in 1Q15 versus 31.5% for 1Q14. Improvements in controlling marketing and administrative costs further contributed to 1Q15 net profit of US$4.4m compared to US$3.0m in 1Q14 and yielding a 4.5% point improvement in net profit margin from 27.5% in 1Q14 to 31.9% for 1Q15.

This improvement in gross profit margin comes from ANH having expanded its owned-fleet vessels, enabling it to command a higher gross profit margin than vessels cross-chartered in. Currently the ANH fleet consists of 14 owned vessels and 2 vessels under joint operations, with 2 more vessels under construction:  a 75m Platform Supply Vessel (PSV) slated for delivery in September 2015 and a liftboat slated for delivery in March 2016.

Key takeaways

The following key points and observations were made over the course of the discussion with ANH:

  • ANH management indicated a 70% minimum committed utilization for its owned vessels in 2015.  A mix of long term and rolling short term contracts led to over fleet utilization of 91.1% in FY13 and 91.5% in FY14, and management indicated that the 70% committed fleet utilization does not factor in renewals of short term charters. In the likely event that short term charters are renewed for ANH, overall utilization for FY15 will be maintained at the 91% level.
  • ANH gross revenue faces risks in the form of charter rate depression as more players attempt to enter the Middle East market, which remains one of the stronger markets for Offshore Support Vessels. The stated continuation of high oil production from theMiddle East, with new tenders being issued by NOCs as the necessary maintenance for offshore rigs, keeps up demand for the vessels ANH provides.
  • With regards to acquisitions, ANH maintains a conservative approach to acquiring new vessels, as the company indicates its desire to maintain a healthy gearing ratio. 1Q15 net gearing stands at 22%, compared with peer industry average of 44%, and an effective interest rate on debt of 4.8%. On the whole, the healthy debt profile allows ANH room to expand its physical assets.
  • In April 2015 ANH completed the acquisition of a 40% stake in Astra Offshore Sdn Bhd, a supplier of products and services to oil and gas companies in Malaysia. This acquisition represents a diversification of ANH activities beyond the core market in the Middle East, and Astra has contractual commitments that offer ANH an opportunity to expand cross-chartered vessels to new segments. In addition, ANH has achieved pre-qualification status in Ghana, and is beginning to participate in formal tenders. These acquisitions facilitate geographic expansion for ANH and provide a means to reduce geographic risk concentration.

Valuation                                                                                                                                                  

The key point to consider when assessing ANH is the medium term health of the Middle East offshore oil services market, and the ease by which competitors can enter that space. New entrants will inevitably push down charter rates, but the competitive advantage ANH has as a historical operator in the region, with the requisite permits necessary to operate in the region, is likely to allow ANH to maintain its utilization rate for its vessels.

The addition of more vessels into ANH’s owned-fleet come September this year and March 2016, and will likely improve ANH gross profit margins, though debt would increase due to long-term borrowings used to finance the new vessel acquisitions.

At S$0.50,  ANH trading at 7.4x annualized FY15 PER compared to the industry average of 9.0x PER. We find ANH to be undervalued relative to its peers based on this metric, while its net gearing, currently at 22% versus industry average of 44%, indicates its capacity to expand. 

 


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