When the price of crude oil increases, the need for crude oil storage also increases. Prima Marine Public Co.,Ltd (PRM) is a marine transportation company that also provides storage for crude oil and other petroleum products. The company has 4 business segments including trading activities, both domestic and international, floating storage units, offshore vessel activities and ship management activities.
BUSINESS DESCRIPTION
- Business overview
- Corporate strategy and long-term goals
- Vision of the company
- Objective of the company
- Long-term goal and strategies
- Service Strategy
- Marketing Strategy
- Business Segments
- Business Segment Revenue
- Management and Governance
The aim is to provide clear direction for both aspects and ensure they are achievable and in line with the company's vision. Ship Management Business (“SM Business”) - the main scope of work consists of navigation commands (steering) and control, provision of crews, organizing training in accordance with international regulations and standards, and health and safety care for crews, maintenance of ships hull, engine and tools and equipment, execution of licenses and documents related to government agencies, etc. To achieve effective performance and maintain a satisfactory level of transparency to increase investor confidence, corporate governance policies will of the company cover 5 sections of different aspects of shareholders as follows.
ANALYSIS OF MACROECONOMY, INDUSTRY, AND COMPETITORS
Macro-economy Analysis
- The Global and Thailand’s GDP
- The Global and Thailand’s Inflation rate
On the other hand, Thailand's real GDP was slightly more severely affected compared to global GDP by the pandemic and the imposed lockdown restrictions. The percentage change in its GDP growth fell to -6.2%, which is more than double that of global GDP. Despite this, economic growth picked up after the easing of lockdown measures, as exports and private consumption are expected to recover.
Similar to global GDP, however, growth is expected to slow slightly due to the impact of the war in Ukraine as well as high inflation and ongoing travel restrictions in countries such as China. Supply chain disruptions due to COVID-19 and the war in Ukraine have pushed the inflation rate as high as 7.4% as commodity prices rise significantly. With oil and gas underinvested from previous years due to the impact of the pandemic, the added issue of geopolitical uncertainty is only driving inflation to unprecedented levels.
There is also the issue of supply bottlenecks due to repeated shutdowns and other various problems related to the consequences of the pandemic. As such, the inflation rate is expected to maintain an unusually high growth rate and remain elevated for the foreseeable future, while gradually declining.
Industry Analysis
- Overview of Oil & Petrochemical Tanker Business
- Overview of Fuel and Crude Oil Price in Thailand
- Overview of the Floating Storage Unit
As a result, there was an excess supply of crude oil, leading to a reduction in crude oil price in the market on a global scale. Initially, oil trading companies use this opportunity to speculate profit from oil reservation, leading to an increase in the requirement for the use of FSU (Floating Storage Unit) Vessels. In addition, the low cost of fuel oil also results in lower costs in the business operations of FSU for the company.
In the following year, however, crude oil prices rose continuously since the first month of 2021, but this upward trend in prices was abruptly halted by the re-emergence of a new variant, the Omicron variant, which suppressed oil demand due to fears of the return of quarantines. They are stationed at their docks to provide storage and blending services for various oils, such as crude oil or low-sulphur fuel oil. 5 FSU vessels are docked in Malaysia while the remaining vessel is docked in Ko Si Chang, Chon Buri, Thailand.
Similar to the tanker industry, operating FSU vessels requires a high investment fund to operate in the field. Because the demand for storage units is directly related to the use of oil, mainly within Singapore and Malaysia due to the fact that they are the regional centers of oil trading, the impact of COVID-19 also affects the industry as a whole due to the reduction in Asia Peaceful. oil consumption requirements. Global crude oil price volatility as a direct result of the Ukraine War has resulted in reduced demand for FSU vessels in general.
With the recovery of oil prices and rising average bunker costs, it is likely that this business unit will take a slight hit in the near future.
Competition Analysis
- VL Enterprise PLC
VALUATION
Financial Analysis
- Growth analysis
- Dupont’s analysis
According to cost of goods sold charts, it appears that VL was able to manage cost of goods sold in line with historical levels. However, based on the ratio of cost of goods sold to operating income, both PRM and VL have the same trend, as most of their cost of goods sold was attributable to fuel. According to the net profit and net profit margin charts, PRM and VL seem to have an upward trend in net profit with CAGR of 11.39% and 34.57% respectively.
PRM's strong increase in net profit in 2020 was due to the sale of two FSUs. Clearly, VL's free cash flow to corporates is highly volatile, while PRM's free cash flow to corporates has been increasing over the past four years, peaking at 954 million baht in the most recent year. To determine how profitable a company is relative to its equity, we use Dupont's analysis to analyze PRM's performance compared to its primary competitor, VL.
VL also had a higher asset turnover than PRM over the previous five years, but PRM has a higher NPM and capital multiplier.
Discounted cash flow valuation
- Performa statement
- DCF Analysis
- The scale for the rating
- Sensitivity Analysis
For FSU revenue forecasts at this time, we find a correlation between oil prices and FSU revenue, because if oil prices are low, oil storage will be high. As a result, we correlated (logarithmically regressed) oil prices and the revenues of former Soviet Union companies from 2018 to 2021 and used Fitch ratings' oil projections from 2023 to 2026 to calculate the revenues of former Soviet Union companies between 2023 and 2026. Starting with the forecast of the cost of good sales for 2022F, we used the first quarter of 2022 to forecast cost of goods sold for the full year 2022.
As a result, the number of oil transportation cycles in the company has increased, resulting in economies of scale and a reduction in cost of goods sold. For FSU's forecast for goods sold during the period, we find a correlation between oil prices, oil prices and cost of goods, as bunker consumption (oil consumption) is a significant component of variable cost of goods. Therefore, we correlated (linear regression) oil prices and commodity costs from 2018 to 2021 and.
Ke = cost of equity Wd = weighted by debt Kd = cost of debt Tax = corporation tax. This is because historical data shows that when crude oil prices rise, the amount of FSUs used by the company falls. As shown in Table 4.12, there are three rating scales based on the difference between the latest market share price and the valuation target price.
Therefore, we perform sensitivity analysis using key factors such as the cost of debt, WACC and terminal growth to determine how sensitive the price is to changes of and 50% in these variables. Alternatively, the cost of debt is the least sensitive to the share price, as evidenced by when the cost of debt changed by 50%, the target share price changed to THB 11.21 (reduced by 8.03%), while when the cost of debt debt changed by -50%, the target share price changed to THB 13.38 (increased by 8.91%). According to the aforementioned analysis, WACC is the most sensitive input factor for share price, and the target price of THB 12.19 per share is determined by 8.09% of WACC as 9.55% of the cost of equity using the DCF model.
Valuation recommendation
INVESTMENT RISKS
Macro and Industry Risks
- Risk from the possibility of Coronavirus (COVID-19) pandemic resurgence
- Risk from the fluctuations and volatility in demand and supply of oil consumption
- Risk from possible drastic change in transportation service business
The impact of the COVID-19 pandemic had proved to be severe for myriads of industries worldwide at an unprecedented level. The Thai economy has suffered severely under the strict rules on travel and social distancing, resulting in a significant slowdown in economic growth. The Oil and Petrochemical Tanker Business and PRM.BK's Floating Storage Unit Business are no exception to the disruption from the pandemic.
PRM.BK's offshore business unit is also affected by the pandemic, albeit to a lesser extent. PRM.BK's business operations are directly linked to the supply and demand of oil consumption, whether it concerns the transport of petrochemicals or the storage of these substances. The second quarter of 2022 will see a recovery in oil demand and by extension its price, following the gradual economic recovery from the pandemic, and preventive measures are easing as vaccine coverage gradually improves.
Despite this, it is possible that a fluctuation in demand and price is on the horizon in the oil and petrochemical market. Furthermore, the turmoil from the Russia-Ukraine conflict was one of the main reasons for the oil shortage, especially with Russia being heavily sanctioned despite being one of the main oil producers. It is a difficult task to estimate how long the war will be, and therefore, it is reasonable to assume that fluctuations in supply and demand will be a given for the foreseeable future.
PRM.BK has expressed concern about potential new entrants to the market due to such opportunities and difficulties by which their operations could be assessed against PRM.BK's operations and whether they could be considered competitors in the same industry.
Company-specific Risks
- Risk from difficulty regarding the purchase and selling of vessels The primary business operations of PRM.BK require the need to both
However, the company now anticipates the arrival of other forms of closely related transportation, such as batteries, liquefied natural gas or hydrogen fuel.
CONCLUSION
Investment Recommendation
Triggers for re-assessment
Limitations
Therefore, we advise investors to BUY this stock, based on our analysis of the company using discounted cash flow (DCF) valuation. In addition, the vast majority of data was derived from historical documents, which may not accurately reflect the current situation and unpredictable future developments.
