Tuesday 20 November 2012

KS Energy

OCBC on 16 Nov 2012

KS Energy (KSE) reported a 21.9% increase in revenue to S$161.3m and a net profit of S$14k in 3Q12 vs. a net loss of S$11.5m in 3Q11. 9M12 revenue and gross profit accounted for 80% and 78% of our full year estimates, respectively. Net profit was also within our expectations. 3Q12 marks the group’s second quarterly net profit after nine consecutive quarters of net losses. Management is still reticent about funding plans for its convertible bonds that may be redeemed in Mar. It also mentioned that operating conditions from now till early 2013 are likely “to remain challenging”. After tweaking our estimates and rolling forward our valuation to 1.2x FY13F NTA, our fair value estimate slips from S$0.83 to S$0.78. Maintain HOLD.

2nd profitable quarter
KS Energy (KSE) reported a 21.9% increase in revenue to S$161.3m and a net profit of S$14k in 3Q12 vs. a net loss of S$11.5m in 3Q11. 9M12 revenue and gross profit accounted for 80% and 78% of our full year estimates, respectively. Net profit was also within our expectations. 3Q12 marks the group’s second quarterly net profit after nine consecutive quarters of net losses, and its results were also not boosted by any significant one-off gains. 

Update on operations and bonds
Revenue growth was driven by the distribution business in 3Q12, while the drilling segment had a relatively stable quarter. The Titan 2 liftboat is still idle (has been off hire since Dec 2011), but we expect to see earnings contribution from the Java Star (300ft jack-up rig) starting in late Dec or early Jan 2013. This is a joint operation with Pertamina Drilling under a 1+1 year contract worth US$87.6m. With regards to KSE’s S$100m convertible bonds that may be redeemed in Mar next year, management is still currently “working on various options to meet this funding requirement” should the redemption option be exercised. It would be helpful if a strategic investor provides some financial support at this juncture. 

Maintain HOLD
As mentioned in our earlier report, the group may break even this year, as business in the distribution segment improves and the drilling division sees continued smooth execution. We are forecasting a single-digit net loss of S$1.0m (vs. US$78.8m net loss in FY11 for now, assuming there are no significant write-downs or asset impairments in 4Q12. Meanwhile, management expects operating conditions from now till early 2013 “to remain challenging”. After tweaking our estimates and rolling forward our valuation to 1.2x FY13F NTA, our fair value estimate slips from S$0.83 to S$0.78. Maintain HOLD.

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