1.  STRAITS  INTER  LOGISTICS is one  of  the  licensed  bunker operators in Malaysia (the only listed bunker player in Bursa & Singapore). Straits is one of the leading bunker operators in Malaysia with an estimated 33% of the legal market share (refer Maybank report). Its main business in the oil trading and bunkering business (both MFO & MGO, refer to appendices for what is bunkering mean)

2.  Strait’s growth in the bunker business in Malaysia mainly through acquisitions (55% of Tumpuan  Megah  Development in Sept 2018 for 35.8m). This TMD acquisition enable them to grow its capacity by 1200% (from 1m litres to 12m litres capacity) and also widen its geographical reach to nine ports in Malaysia (previous 0 port, now got permit to access 14 ports) and diversify its customer base.

3.  Why Straits is attractive? It is due to Straits is in a good position to capture increasing marine gas oil  (MGO) market (one of the marine fuels).

4.  What MGO market is increasing? Two reasons, first is rising O&G activity in Malaysia and second is International  Maritime Organization (IMO) 2020 global marine fuel Sulphur cap. Malaysia MGO demand in 2019 is expected to increase by 40%.

5.  IMO 2020 will enforce a new 0.5% global Sulphur cap on marine fuel content from Jan 2020, lowering from the present average 3.5% limit of the MFO. The effect of IMO 2020 0.5% Sulphur cap may cause demands of cleaner marine gas oil (MGO) to increase. MGO is more costly initially than the marine fuel oil (MFO) used by the majority of ships today.  Ships can also continue to purchase MFO, but install ”scrubbers” to reduce the output of Sulphur Oxides (install scrubber leads to downtime & space limitation).  

6.  Currently Straits operate 624m litres of MGO loading annual capacity and revenue and gross profit should improve on greater demand for its MGO. MGO is more costly than MFO which lead to higher profit margin. FYI, Straits also provide bunkering services for MFO through its subsidiary and also trading of MFO. They also have international market coverage like Hong Kong, China and Taiwan through acquisition of Banle.

7.  The profit of FY2018 result increases more than 50% YoY (record high) on the back of strong revenue. Sustainable growth on the arising demand for MGO product especially in years 2019-2020.

8.  Strong performance in 2018 was due to: i) increase in revenue (only reflected in Q4), ii) profit margin  improvement, iii) consolidation of results of newly-acquired Tumpuan  Megah Development, TMD)

9.  EPS dropped due to the enlarged share capital for the acquisition of TMD (116.5 million shares issued).

10. Sturdy balance sheet, with net gearing of 0.26x which remain comfortable. Negative cash flow due to cash on delivery to vendors of MGO.

11. Aggregate profit guarantee of RM10.0 million for FY19 and FY20 from 55% stake in Tumpuan Megah Development, aggregate profit guarantee of USD1.65 million for FY19 and FY20 from 38% stake in Banle Energy International Limited

12. Future profit and revenue growth drivers come from:

• ·Increase deliverable tonnage capacities through acquisition of vessels or chartering third parties’ vessels (increase capacity to enlarged 12m litres, 12x expansion). The additional capacity is allocated for the MFO, as a vessel generally consumes 9x more MFO as compared to MGO.
• Capture the untapped oil bunkering market in Malaysia (Market size for Marine Fuel in Singapore is about RM80.0 billion in 2017, while Malaysia market is estimated about RM20.0 billion (Straits’ max capacity at RM1.2 billion revenue where still got big room of revenue growth from FY2018 result)
• Broadening geographical coverage - Tap into Banle’s existing sales and marketing networks (existing customers in Hong Kong, China and Taiwan)
• Expanding the logistics services - To offer additional inland transportation services to the existing customers from oil bunkering services (to acquire 35 trucks by end of 2019)

       13.  Total Capacity: 9 vessels with 12.0 mi litres, based on RM2.00  per litre for marine fuel and 4 loadings per month, it will be          able  to generate a total revenue of RM1.2 billion per year (assume close to 100% capacity utilization).

       14.  Valuation: Show growing profit for past 4 quarters results when they started to venture to bunker & oil trading businesses            in 2018. I expect the revenue and profit growth for bunker to be continue in FY2019 with estimated revenue of 500-550m,                  assume net margin of 2.0-2.5%, estimated net profit = ~10-14 mil, --> Estimated FY19 EPS = 2.2 sen.   Fair value of                  Straits can be summarized in the table below:

         The justifications on Strait should worth PE of 12x-14x are as below:

· Riding on improving Malaysia upstream O&G sector outlook (About 70% of its customers currently consists of OSV service providers which include  marine  vessels  such  as  offshore  oil  rigs,  drill  ships,  LNG  tankers, tugs  and  barges.  Latest  PETRONAS  Activity  Outlook  for  2019-21, there is an acute rise in demand for OSVs.)

·   Positioned to capture the growing demand with a total of 9 vessels with total capacity of 12.0 million litres to further expand the bunkering business and its geographical coverage.

·   A leading and licensed bunker operator in Malaysia (estimated 33% of  the  legal  market  share with big room to grow as tighter enforcement on illegal bunkering is expected to improve government tax collection)

·   Strong demand of its higher margin MGO product due to implementation of IMO 2020 regulation (demands of MGO starting to increase from 2019).

15.  Risk

•   Increase in illegal oil bunkering operation in Malaysia
•   Oil price plunge and slowdown in Malaysia Oil and Gas upstream activities

16.   Listed logistic companies (not direct peers) simple comparison

• Maybulk –Operation still loss making in recent quarter and has been continuously suffer loss for past 4 years (if strip off disposal gain and reversal of impairment, negative PEx, market cap 595 mil.
• Syscorp (Shin Yang Shipping corp) – PEx 55, market cap 353 mil
• Straits – high revenue growth, trailing 12M PEx 39, forward FY2019-20 PEx 10.9 (based on estimated EPS of 2.2 sen), market cap 156mil (based on 24.0 sen).

Appendices:

1.   Bunkering services refers to the provision of marine fuels to ships, as well as other ocean faring vessels, such as oil tankers, container vessels, cargo vessels, cruise ships and ferries, as well as vessels utilised in the upstream oil and gas industry such as offshore support vessels, submersible and semisubmersible rigs and FPSO vessels. Bunkering can be broadly categorised into onshore bunkering and offshore bunkering, whereby marine fuel is typically pumped into vessels by refuelling vessels barges, product tankers or another ship in harbours, close to shore, or in open waters. Onshore bunkering involves the transfer of marine fuels on a shore-to-ship basis from an onshore facility, whereas offshore bunkering involves the transfer of marine fuels on a ship-to-ship basis. Refer to figure below for better illustration:

2.      International Maritime Organisation Sulphur Cap 2020

• Sulphur content to be permitted to just 0.5% (from current 3.5%) or vessels to equip scrubbers to  remove sulfur from ship exhaust (Straits is currently supplying MGO with 0.05% sulphur content).
• Scrubbers will cost an average of USD2.0 million to USD6.0 million, with downtime to be occurred
• Industry players reckon that going straight to burn MGO is the most practical option.

3.  55% stake in Tumpuan Megah Development Sdn Bhd (“TMD”), acquired in Sept 2018, purchase consideration of RM35.8 million, satisfied by cash RM7.8 million and 116.5 million shares at RM0.24 per share. Aggregate profit guarantee of RM10.0 million for FY19 and FY20

4.      Banle Energy International Limited, acquired in Feb 2019, purchase consideration of RM15.0 million, satisfied by 63.8 million shares and aggregate profit guarantee of USD1.65 million for FY19 and FY20.

5.   Maybank coverage on Straits as link below:

https://www.thestar.com.my/business/business-news/2019/03/26/maybank-ib-initiates-coverage-on-straits-buy-with-tp-of-38-5-sen/

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Disclaimer:

This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company and the contents of this report should not be considered as professional financial investment advises or buy/sell recommendations. I strongly encourage you to do your own research and take independent financial advice from a professional before you proceed to invest.