Marine fuel supplier Chemoil seeks $370 million in Singapore IPO

Valuation in line with main industry comparable, but investors glancing at Singapore commodities trader could help drive demand.
Chemoil Energy has kicked off the roadshow for an initial public offering that aims to raise up to $373.6 million ahead of a listing in Singapore next month.

Originally set up in the US in 1982 but now incorporated in Hong Kong and headquartered in Singapore, the company is one of the largest integrated suppliers of marine fuel. Essentially a ôgas station for shipsö, Chemoil controls the entire flow of fuel from purchase, blending, transportation and delivery to the end-customer.

This cost efficient approach and the convenience of dealing with one party for global re-fuelling needs has attracted some of the largest shippers in the world. In the 18 months to June 2006, ChemoilÆs key customers included AP Moller-Maersk, American President Lines, Evergreen Marine and Yang Ming Marine Transport.

The IPO comprises 439.5 million shares, or 30% of the capital, being offering at a price of between $0.65 and $0.85 per share. There is a 15% greenshoe that could lift the total proceeds to about $430 million. 3% of the deal will be earmarked for Singapore retail investors in a public offering that will run from September 27 to October 2.

JPMorgan, Morgan Stanley and UBS are joint bookrunners for the deal.

A small portion of the shares û 16.7% - are secondary and will be sold by Japanese oil company Itochu Corp which owns 50% of the company (the rest is owned by the founder Robert Chandran), while the remainder will be new shares issued by the company.

The proceeds from the sale will go primarily towards potential acquisitions and joint ventures as well as for the purchase of more ships and barges and the construction of new terminal facilities. Chemoil wants to own more of its own transport vessels and facilities so that it can cut back on rents and capture better margins.

ôThe company makes a return on equity of about 20% so it makes sense to buy rather than to be asset light and rent everything they need,ö says one observer.

A portion of the proceeds will also be used as working capital to relieve some of its reliance on short-term debt. According to the prospectus, the company is ôhighly dependant on short termö as it has a mis-match between its receivables and payables arising from the fact that it typically grants a 30-day credit to its customers, while getting an average of 16 days credit from its suppliers.

The difference is funded by borrowings and equity. As of the end of June its debt-to-equity ratio stood at 2.74 times.

The price range values the company at a 2007 PE of about 11.5-14 times, based on the average syndicate profit projections. This is in line with World Fuel Services, which trades at around 14 times next yearÆs earnings and is considered to be the main international comparable.

World Fuel is one of the worldÆs largest marine fuel traders, but contrary to Chemoil, it doesnÆt add any value to the process in terms of blending or delivering fuel to ships, relying instead on independent suppliers, including Chemoil, to move it for them. It also doesnÆt provide any storage.

Singapore investors are also looking at locally listed Olam International as a comparable. Olam isn't exactly in the same industry since it is a trader of soft commodities, but the businesses are similar enough to have sparked hopes that Chemoil will be able to repeat the share price rally seen by Olam since it listed in February 2005. As of yesterday, the commodities trader was up 179% since its debut.

Olam current trades at a 2007 PE of 22 times, which means that ôif you accept the argument that these two companies are comparables then there is quite a big valuation gap that should favour Chemoilö, says one source familiar with the IPO process.

Among ChemoilÆs other competitors are Singapore-based Hin Leong Trading, which belongs to a group referred to as ôregional independentsö that supply marine fuel in one or two bunker ports within a specific region, and the Bominflot Group, which like Chemoil is an integrated supplier that operates in several different locations. Neither of these two companies are listed, however.

Because of the local connection, Singapore and Asian investors are expected to be the ones to carry this deal, although the underwriters are also said to be anticipating good interest from the US and from global investors specialising in the transport and logistics sector.

While the company is obviously in the business of dealing with oil products, it doesnÆt actually offer any exposure to oil prices as it essentially adds a fixed commission on top of the price it pays for the fuel at the refiners. As a result, the companyÆs gross margins have changed very little as oil prices have climbed from $26 per barrel 18 months ago to $76 today.

The company typically carry its inventory for about seven to 10 days, but since it hedges most of its exposure it has a pretty market neutral position at any given time, according to an investor briefed on the operations.

That said, its sales has increased at a compound annual growth rate of 45.3% in the three years to 2005 as demand for marine fuel has continued to grow. In 2005 it recorded revenues of $3.6 billion, of which about half came from outside the US. Its net profit has more than doubled to $49.5 million last year from $22.4 million in 2003.

This is expected to continue in the years ahead as the supply of new ships grow and the demand for container transport increases and Chemoil says it will continue to focus its operations to high volume locations like the Americas, the Amsterdam/Rotterdam/Antwerp region, the Mediterranean, the Middle East and India.

At the same time, though, it will also be expanding into new emerging markets such as the Baltic region, South America, Africa and Asia. At the moment, it sees little opportunity to move into China as it is quite difficult to obtain an operating license. Instead it will continue to build its business in Singapore, which is the largest port for bunker fuels in world.

Another growth opportunity is expected to arise as global oil majors like Shell, BP and Exxon Mobil turn away from low margin businesses like marine fuel, focusing instead on more profitable products like kerosene, diesel and gasoline to make the most of the high oil price.

The price is expected to be fixed on October 3 and the trading debut is scheduled for October 9.
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