Kim Heng Offshore & Marine reported a weak set of 4Q14 results. Excluding one-off items, we estimate core net profit to be S$1.9m in the quarter, such that full year core PATMI of S$8.1m accounted for close to 70% of our estimate, below ours and the street’s expectations. Looking ahead, Kim Heng’s CEO sees the oil and gas industry heading into a downturn similar to the 1980s. As such, it is seeking to cut costs and secure work from other industries. The group is currently servicing warm-stacked rigs; should owners choose to cold-stack them, it would affect Kim Heng negatively. After lowering our earnings estimates with a more downbeat assessment of the industry, our fair value estimate slips from S$0.16 to S$0.12, based on a SOTP valuation that takes into account Kim Heng’s net cash position of S$40m. Maintain HOLD. Meanwhile, a S$0.005/share final dividend has been declared.
Soft FY14 results
Kim Heng Offshore & Marine reported a 21% YoY fall in revenue to S$20.5m and net loss of S$1.0m in 4Q14, mainly due to a lower gross profit margin of 30% in the quarter vs 44% a year earlier, as well as S$3.3m provisions for doubtful trade receivables (related to a towage contract; legal proceedings underway to recover the money). Excluding such one-off items, we estimate core net profit to be S$1.9m in the quarter, such that full year core PATMI of S$8.1m accounted for close to 70% of our estimate, still below ours and the street’s expectations.
Industry heading into a downturn
Looking ahead, Kim Heng’s CEO sees the industry heading into a downturn similar to the 1980s. As such, it is seeking to cut costs in various ways, such as reducing the number of workers and overtime pay. Currently, the group has more than 200 workers, which may fall to 100 or so depending on the outlook. The group is also seeking work from other sectors. For instance, it may seek to charter out assets for infrastructure-related work; the group has also secured orders to build two aluminium boats.
Cold-stacking of rigs would be negative for group
According to management, there are about 15 warm-stacked rigs in Singapore yards, and another 15 near Johor; many cold-stacked rigs go to Labuan. Currently, the group is servicing about 15 warm-stacked rigs, and this number may grow as rig utilisation levels fall. However, if rig owners choose to cold-stack their rigs, this would impact the group negatively. Currently, rig utilization in Asia is on a downward trend, resulting in a decrease in demand for rig maintenance and related services. As such, the group expects business to be “volatile and challenging” in 2015. After lowering our earnings estimates with a more downbeat assessment of the industry, our fair value estimate slips from S$0.16 to S$0.12, based on a SOTP valuation that takes into account Kim Heng’s net cash position of S$40m. Maintain HOLD. Meanwhile, a S$0.005/share final dividend has been declared.
Kim Heng Offshore & Marine reported a 21% YoY fall in revenue to S$20.5m and net loss of S$1.0m in 4Q14, mainly due to a lower gross profit margin of 30% in the quarter vs 44% a year earlier, as well as S$3.3m provisions for doubtful trade receivables (related to a towage contract; legal proceedings underway to recover the money). Excluding such one-off items, we estimate core net profit to be S$1.9m in the quarter, such that full year core PATMI of S$8.1m accounted for close to 70% of our estimate, still below ours and the street’s expectations.
Industry heading into a downturn
Looking ahead, Kim Heng’s CEO sees the industry heading into a downturn similar to the 1980s. As such, it is seeking to cut costs in various ways, such as reducing the number of workers and overtime pay. Currently, the group has more than 200 workers, which may fall to 100 or so depending on the outlook. The group is also seeking work from other sectors. For instance, it may seek to charter out assets for infrastructure-related work; the group has also secured orders to build two aluminium boats.
Cold-stacking of rigs would be negative for group
According to management, there are about 15 warm-stacked rigs in Singapore yards, and another 15 near Johor; many cold-stacked rigs go to Labuan. Currently, the group is servicing about 15 warm-stacked rigs, and this number may grow as rig utilisation levels fall. However, if rig owners choose to cold-stack their rigs, this would impact the group negatively. Currently, rig utilization in Asia is on a downward trend, resulting in a decrease in demand for rig maintenance and related services. As such, the group expects business to be “volatile and challenging” in 2015. After lowering our earnings estimates with a more downbeat assessment of the industry, our fair value estimate slips from S$0.16 to S$0.12, based on a SOTP valuation that takes into account Kim Heng’s net cash position of S$40m. Maintain HOLD. Meanwhile, a S$0.005/share final dividend has been declared.
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