Straits Inter Logistics structuring bunkering business for growth

This article first appeared in The Edge Financial Daily, on September 23, 2019.
Straits Inter Logistics structuring bunkering business for growth
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Straits Inter Logistics Bhd
(Sept 20, 20.5 sen)
Maintain buy with an unchanged target price of 42 sen:
Straits Inter Logistics Bhd’s (SIL) new venture into marine fuel oil (MFO) bunkering services is a game changer for the company.

SIL is also in an entrenched position to capture increasing marine gas oil (MGO) demand from higher offshore support vessel utilisation in Malaysia from the second half of 2019 (2H19) and into 2020.

SIL’s share price has yet reflected its strong earnings visibility at only 7.2 times financial year ending Dec 31, 2020 (FY20) price-to-earnings ratio.

Following from a recent meeting, the management shared that the average utilisation of its total capacity of 12 million litres was about 40% in 1H19, still in line with our estimate of 44% for this year.

The management is also keen to complement and diversify away from its single product risk — MGO for oil and gas (O&G) customers — by venturing into MFO bunkering services.

We believe such a venture would be value-adding to SIL since the MFO market size of an estimated RM14 billion is much larger than Malaysia’s MGO estimated market size of RM6 billion.

We understand SIL is in final talks with a few of the world’s largest container shipping companies, in relation to taking up most of SIL’s Antlia and Poseidon capacity for the supply of MFO.

The vessels of these parties range between 1,000 TEU (twenty-foot equivalent unit) and 19,000 TEU. We see SIL as well-positioned to secure the supply given its high quality fuel, proven track record with O&G players and its strict safety practices.

The supply would be in the anchorage of Johor port/Tanjung Pelepas port limit. Besides this, SIL would start providing bunkering services for cargo ships that are traversing the Straits of Malacca.

Imputing the above factors, we revise higher our MFO sales assumptions by 67%/178%/200% for FY19/FY20/FY21.

That said, we reduce our average selling price assumption slightly for its MGO product for FY19 to FY21 due to competitive pricing.

We also raise our depreciation cost by 6% to 9% to take into account its newly acquired vessel, Poseidon. — Maybank IB Research, Sept 20