Making Sense of TUG IPO

Harbor Star Shipping Services, Inc. (PSE: TUG, the “Company”) is engaged in marine services particularly harbor assistance (tugboat), lighterage, towing, and salvage operations. Revenue contribution is as follows:TUG1

Harbor assistance is required by the Philippine Port Authorities (PPA) in the process of docking and undocking at ports for vessels that has greater than 500 metric ton (MT). Large vessels have no side to side mobility which makes maneuvering difficult on ports. A harbor assist can be completed at the minimum of 1-2 hours.

The Company services 12 base ports located throughout the country and focus its 27 tugboats (24 company-owned, 3 chartered) with an average age of 33 years at ports with heavy vessel traffic.  Below are five most active ports where TUG is present and number of tugboats utilized on each port:

TUG2

TUG enjoys the privilege to be the sole harbor assistance provider in Manila International Container Terminal (MICT) until April 2018. MICT is the most active port in the Country and is TUG’s largest contributor of harbor assistance revenues.

Lighterage is a process where barges are utilized to carry minerals from site to a larger vessel.TUG3

Currently TUG offers lighterage service to a mining company with operations in Surigao and Palawan and plans to target more companies engaged in the mining industry. Lighterage services of the Company just commenced operations in May 2012 and already contributed 6% of total 2012 revenues or approximately P48 million. As of March 2013, lighterage contributed 10% of total revenues of the Company or approximately P20 million.

TUG’s salvage operation has the following services:

  1. Vessel in distress – the service is given to the salvor that is able to respond first. This includes fire, capsized or sinking vessels, that requires rescuing.
  2. Wreck removal – reflating of vessels that ran aground, retrieval of vessels. Salvors bid for the contract.
  3. Wayward vessels – breakaway or abandoned vessels drifting afloat and wandering into waters that are vulnerable to collisions.

The following are TUG’s successful salvage projects:TUG4

Revenue attributable to the above services is as follows:

TUG5

The Company claims its advantages to be the following:

  1. International accreditation for its managements systems specifically on quality services, environment, and safety.
  2. Only tugboat service provider that obtains Certificate of Public Convenience (CPC) from Maritime Industry Authority (MARINA). CPC enable the Company’s tugboats inter-island navigation which maximizes the utilization of the tugboats. A tugboat stationed in Cagayan de Oro may be commissioned to provide increase in demand in Leyte, Samar and Bohol or cover any tugboats from other ports that will be temporarily unavailable due to maintenance.
  3. Experienced management

The Company will have the following strategies:

  1. Expand operations in key ports in Mindanao and Visayas and secure exclusivity contract on private ports.
  2. Consider growth opportunities through joint venture agreement within Southeast Asian region specifically on Malaysia, Indonesia, Vietnam, Papua New Guinea, and Myanmar.
  3. Expand lighterage services.
  4. Offer new marine services particularly in the oil industry.

Comments:

At an IPO price of P1.88, TUG will trade at 7.7x PE ratio with earnings per share of P0.24 after share issuances. However just like all other companies in the local maritime industry, TUG is at risk in with the amendments of the cabotage law. Cabotage law states that domestic shipping routes shall only be served by local shipping lines. Should cabotage law be removed, foreign tugboats may now participate in the domestic market presenting a threat for TUG’s strategies(offering new marine services) and current market share on its largest revenue contributor which is harbor assistance.

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

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5 thoughts on “Making Sense of TUG IPO

  1. Hi Renzie,

    A PE ratio of 7.7x signals a very good bargain. Do you have a target price for TUG?

    Also, regarding the possible amendment of the cabotage law, do you think it’s likely in the next 2-3 years?

    Thanks.

    Reply
    • Hello,

      A PE ratio of 7 for TUG is expensive. It should be below 5 to provide protection for the cabotage law. 5 years is the exclusive contract of TUG with MCIT.

      I fear that cabotage law may be amended this year or next as mentioned by PNOY in his SONA but I hope it will be extended until 2018 perhaps?hehehehe hopeful thinking.

      Let’s wait for the congress to decide.

      Renzie

      Reply
      • TUG would really take a big hit if the cabotage law is amended. I guess thats the biggest worry for TUG investors, and probably the reason why the owners pushed for this IPO now despite the lower price. Thanks for the analysis!

      • Oh, one more thing. Could you comment on the upward revaluation of TUG’s property and equipment and equity? Does this give a fair valuation of the company’s assets? Thanks.

      • I have a simple valuation approach.hehehehe
        Should I expect the company to be in going concern, i focus on the quality of earnings and multiply it by my desired P/E ratio or should cash flows be predictable i use DCF method.

        Should i expect the company to be a takeover potential, that is the time i focus on assets.

        In the case of TUG, TUG’s asset revaluation has no bearing for me.

        Just my opinion.

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