The bunkering subsidiary of John Keells (JKH); Lanka Marine Services (LMS) which once came into the spotlight of a controversial privatization deal, had grown over four fold in Financial Year 2011, a latest analyst report outlines.
Accordingly a research on JKH’s prospectus by IIFL Securities outlines that Lanka Marine Services enjoys a 45%-47% market share and still leading the pack among LIOC the local unit of Indian Oil (IOC) and Lanka Maritime Services (a fully owned subsidiary of Sri Lanka Shipping).
Currently LMS,LIOC and Lanka Maritime Services share the Jaya Container Terminal (JCT) oil bank capacity of 27,000-32,000 tpm. Floating storage is not permitted by the government and hence LMS is bound to share the facility owned by Sri Lanka Ports Authority (SLPA).
The report says that over the past five years bunkering volumes have grown at an average of 5-10% per annum (in Financial Year 2011, 25% Year on Year-YoY- volume growth). Although the ships arriving at Colombo Port have seen a marginal dip of 1.9% CAGR over 2007-2010, volumes handled at off port limits (12 nautical miles from break water) have grown significantly in the past. LMS has capitalized on this opportunity and expects higher growth from this segment.
LMS margins had come under severe pressure with loss of monopoly status; however, margins have shown notable improvement in Financial Year 2011. Bunker products are 100% imported from UAE, Singapore and India on a 5 day average Platts Index Price (moves with crude oil price). As there is a two week lag period between ordering and delivery, LMS benefits from contango (forward price is higher than spot price) and the prices are benchmarked with regional ports. Hence LMS earnings remain volatile.
With the increase in oil prices, revenue from LMS grew substantially and sectoral topline grew over 40% in YoY in Financial Year 2011 and 25% Year on Year in First Quarter of Financial Year 2012. Nearly 20% of the sector’s operating profit came from LMS and it grew 8.6% Year on Year during First Quarter of Financial Year 2012 (up 6x YoY in Financial Year 2011)