Kim Heng Offshore & Marine (Kim Heng) reported a 2.8% YoY rise in revenue to S$20.1m in 2Q14, but delays in the arrival of drilling rigs and offshore support vessels from customers meant that the group undertook a higher proportion of lower margin projects in the quarter, leading to a drop in gross profit margin from 45.3% in 2Q13 to 30.2% in 2Q14. This led to a 66% YoY (-60% QoQ) fall in net profit to S$1.6m in 2Q14, such that 1H14 net profit met 30% of our full year estimate. Management highlighted the lumpy nature of its earnings, and remains optimistic of its 2H14 financial performance, barring unforeseen circumstances. As at Jul 2014, the group has secured work worth about S$86m, of which S$40m is attributable to a recently signed master service agreement. We lower our P/E from 11.5x to 10.5x with recent lower valuations of the group’s peers, and based on blended FY14/15F earnings, our fair value estimate is lowered from S$0.34 to S$0.31. Maintain BUY.
Soft 2Q14 with delays in arrival of rigs
Kim Heng Offshore & Marine (Kim Heng) reported a 2.8% YoY rise in revenue to S$20.1m in 2Q14, mainly due to higher revenue in the Vessel sales and newbuild segment of S$3.8m which offset a decrease in revenue from the Offshore rig services and supply chain management segment. Delays in the arrival of drilling rigs and offshore support vessels from customers meant that Kim Heng undertook a higher proportion of lower margin projects in the quarter, leading to a drop in gross profit margin from 45.3% in 2Q13 to 30.2% in 2Q14. This led to a 66% YoY fall (-60% QoQ) in net profit to S$1.6m in 2Q14, such that 1H14 net profit met 30% of our full year estimate.
Operational updates
Management highlighted the lumpy nature of its earnings due to the short notice period for new work and quick turnaround time for its orders. The group remains optimistic of its 2H14 financial performance, barring unforeseen circumstances. Meanwhile, with regards to its waterfront yard and facilities at 48 Penjuru Road, management updated that it has got clearance from JTC for lease extension till 2036. Management believes that it is also likely to get another 20 years for its facility at 9 Pandan Crescent. The group also plans to build a dormitory housing 500 people (completion likely by 2Q15) with a capex of about S$4-5m. It is currently spending S$90-100k/month on its workers’ accommodation.
Secures more work
As at Jul 2014, the group has secured work worth about S$86m (over and above 1H14 revenue), of which S$40m is attributable to a master service agreement recently signed with an international drilling contractor (new customer) to provide services and supplies to four rigs over the next 18 to 24 months. We understand that they are newbuilds in a Singapore yard for a Central American customer. Still, we lower our P/E from 11.5x to 10.5x with recent lower valuations of the group’s peers, and based on blended FY14/15F earnings, our fair value estimate is lowered from S$0.34 to S$0.31. Maintain BUY.
Kim Heng Offshore & Marine (Kim Heng) reported a 2.8% YoY rise in revenue to S$20.1m in 2Q14, mainly due to higher revenue in the Vessel sales and newbuild segment of S$3.8m which offset a decrease in revenue from the Offshore rig services and supply chain management segment. Delays in the arrival of drilling rigs and offshore support vessels from customers meant that Kim Heng undertook a higher proportion of lower margin projects in the quarter, leading to a drop in gross profit margin from 45.3% in 2Q13 to 30.2% in 2Q14. This led to a 66% YoY fall (-60% QoQ) in net profit to S$1.6m in 2Q14, such that 1H14 net profit met 30% of our full year estimate.
Operational updates
Management highlighted the lumpy nature of its earnings due to the short notice period for new work and quick turnaround time for its orders. The group remains optimistic of its 2H14 financial performance, barring unforeseen circumstances. Meanwhile, with regards to its waterfront yard and facilities at 48 Penjuru Road, management updated that it has got clearance from JTC for lease extension till 2036. Management believes that it is also likely to get another 20 years for its facility at 9 Pandan Crescent. The group also plans to build a dormitory housing 500 people (completion likely by 2Q15) with a capex of about S$4-5m. It is currently spending S$90-100k/month on its workers’ accommodation.
Secures more work
As at Jul 2014, the group has secured work worth about S$86m (over and above 1H14 revenue), of which S$40m is attributable to a master service agreement recently signed with an international drilling contractor (new customer) to provide services and supplies to four rigs over the next 18 to 24 months. We understand that they are newbuilds in a Singapore yard for a Central American customer. Still, we lower our P/E from 11.5x to 10.5x with recent lower valuations of the group’s peers, and based on blended FY14/15F earnings, our fair value estimate is lowered from S$0.34 to S$0.31. Maintain BUY.
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