KS Energy

OCBC on 16 Aug 2012

KS Energy (KSE) reported a 23.4% fall in revenue to S$151.6m and a net profit of S$692k in 2Q12 vs. a net loss of S$5.5m in 2Q11, such that results were within our expectations. 2Q12 marks the group’s first quarterly net profit after nine consecutive quarters of net losses, and results were also not boosted by any significant one-off gains, unlike 1Q12. Management is still “working on various options” to meet a possible funding requirement for its convertible bonds. Though businesses in both distribution and drilling are improving, we are conservatively forecasting a net loss of S$3.5m for now, which is a significant improvement from FY11’s S$78.8m net loss. Rolling over our valuation to 1.1x blended FY12/13F NTA, our fair value estimate slips slightly from S$0.85 to S$0.83. Maintain HOLD.

2Q12 turns in net profit
KS Energy (KSE) reported a 23.4% fall in revenue to S$151.6m and a net profit of S$692k in 2Q12 vs. a net loss of S$5.5m in 2Q11. Revenue was within our expectations, accounting for 22.3% of our full year estimates. 1H12 revenue and gross profit accounted for 50.3% and 50.7% of our full year estimates, respectively. Net profit was also within our expectations. 2Q12 marks the group’s first quarterly net profit after nine consecutive quarters of net losses, and results were also not boosted by any significant one-off gains, unlike 1Q12.

Steady execution in both distribution and drilling
Revenue from the distribution business, which accounted for 71.1% of total revenue, saw a 26.3% QoQ increase in revenue in the last quarter, while the drilling division rose 11.8%. We understand that all of the group’s core assets are currently on hire and it is unlikely that any of them will be coming off-hire for the rest of this year.

Convertible bonds may be redeemed in Mar next year
Recall that the group’s convertible bonds (principal ~S$100m) have an option by bondholders who may redeem the bonds in Mar 2013. Management is currently “working on various options to meet this funding requirement” should the redemption option be exercised. KSE has proven adept at raising funds from investors and partners such as Itochu of Japan, Dubai-based Dutco and private equity fund Actis. Hence we would not be surprised if there is news of further tie-ups in the near future.

Maintain HOLD
Business in the distribution is improving, and coupled with smooth execution in the drilling division, the group may break even in FY12F. However, we are conservatively forecasting a single-digit net loss of S$3.5m for now, which is a significant improvement from FY11’s S$78.8m net loss. Rolling over our valuation to 1.1x blended FY12/13F NTA, our fair value estimate slips slightly from S$0.85 to S$0.83. Maintain HOLD.