KS Energy

OCBC on 3 Mar 2015

KS Energy reported a 40.5% increase in revenue to S$227.3m and a net profit of S$30.1m in FY14 vs net profit of S$23k in FY13. Excluding one-off items such as disposal gains and impairment losses on PPE and non-trade receivables, we estimate recurring net profit to be about S$8.8m for the year vs our forecast of S$3.6m, higher than expectations. However, with the oil price rout, the group could potentially see lower charter rates during contract renewals or maybe even more rig impairments later. If the rig market turns out to be worse than expected, certain units may be left idle as well. Looking ahead, the outlook for the offshore services sector continues to be affected by lower oil prices, and with a re-allocation of resources, we are ceasing coverage on KS Energy.

Hit by impairments and higher depreciation charges 
KS Energy reported a 40.5% increase in revenue to S$227.3m and a net profit of S$30.1m in FY14 vs net profit of S$23k in FY13. Excluding one-off items such as disposal gains and impairment losses on PPE and non-trade receivables, we estimate recurring net profit to be about S$8.8m for the year, higher than our forecast of S$3.6m. In particular, the group saw a S$12.2m impairment on PPE as well as S$5.0m impairment on non-trade receivables in 4Q14; the former relating to the Discoverer 2 land rig and the jack-up accommodation rig, Atlantic Rotterdam. There were also additional depreciation charges relating to depreciation policy revisions. Accounting for about 92.2% of total revenue, the drilling business generated revenue of S$209.5m for FY14 compared to S$144.0m for FY13. The balance 7.8% was from the group's engineering and other businesses.

No official announcement of charter contract for Cosco rig
As for the second jack-up rig from Cosco, recall that the group was expecting to take delivery in 4Q14, but so far there has not been any official announcement of a charter contract yet. According to management, the delivery date for this rig has been pushed back again. With falling jack-up rig utilisation levels, we believe it may be tough securing decent charter rates for this unit.

Ceasing coverage
With the oil price rout, the group could potentially see lower charter rates during contract renewals or maybe even more rig impairments later. If the rig market turns out to be worse than expected, certain units may be left idle as well. The distribution business is also likely to be impacted by lower demand for its goods and services. Looking ahead, the outlook for the offshore services sector continues to be affected by lower oil prices, and with a re-allocation of resources, we are ceasing coverage on KS Energy.

KS Energy

OCBC on 18 Nov 2014

KS Energy reported a 34.2% YoY rise in revenue to S$58.5m and a net loss of S$0.6m in 3Q14 vs. a PATMI of S$0.2m in 3Q13. This brings 9M14 PATMI to S$46.4m, boosted by a rig sale in 2Q14. Core PATMI in 9M14 is estimated to be about S$3m, slightly below our expectations, mainly due to a one-off payment by KS Drilling post the rig sale in 2Q14. If not for the dividend payment, 3Q14 PATMI would have been S$1.9m. Looking ahead, the group is taking delivery of a rig from Cosco in 4Q14 but there has not been any official announcement of a charter contract yet. With the fall in oil prices which could potentially lead to lower charter rates during contract renewals, as well as the recent de-rating of the broader sector, we lower our peg from 0.8x to 0.65x P/B, resulting in a lower fair value estimate of S$0.48 (based on FY15F book). Downgrade to HOLD.

3Q14 PATMI affected by one-off payment
KS Energy (KSE) reported a 34.2% YoY rise in revenue to S$58.5m and a net loss of S$0.6m in 3Q14 vs. a PATMI of S$0.2m in 3Q13. This brings 9M14 PATMI to S$46.4m, boosted by a rig sale in 2Q14. Core PATMI in 9M14 is estimated to be about S$3m, slightly below our expectations. Profit after tax in 3Q14 was a respectable S$3.3m but PATMI slipped due to the reallocation of profits to shareholders from 80% of the profits of a subsidiary (KS Drilling) to 50%. This arose due to the one-off payment of preferred dividends by KS Drilling totaling S$8.6m, post the gains on disposal of a rig in 2Q14. If not for the dividend payment, 3Q14 PATMI would have been S$1.9m.

One Kurdistan land rig may remain idle
Revenue growth for the drilling business was flat on a sequential basis as two land rigs were idle due to tensions in Kurdistan. We understand, however, that one of the two land rigs has resumed work, while visibility is poor for the second rig.

Waiting for charter contract for Cosco rig
The group is also taking delivery of a jack-up rig from Cosco in 4Q14 but there has not been any official announcement of a charter contract yet. Should there be a contract with favourable rates, the group should see a positive impact on next year’s earnings, but given the tight timeline we prefer to assume a conservative half a year’s contribution to earnings in 2015, not forgetting there may be depreciation costs should the rig remain idle prior to deployment. 

Lowering fair value, wait for more visibility post 4Q
We like that KSE is seeing operationally stable quarters, but with the fall in oil prices which could potentially lead to lower charter rates during contract renewals or maybe even rig impairments later, and together with the recent de-rating of the broader sector, we lower our peg from 0.8x to 0.65x P/B, resulting in a lower fair value estimate of S$0.48 (based on FY15F book). Downgrade to HOLD.

KS Energy

OCBC on 20 Aug 2014

KS Energy (KSE) reported a 44.1% YoY rise in revenue to S$59.8m and net profit of S$46.7m in 2Q14 compared to S$1.5m in 2Q13. Earnings were boosted by a S$54.4m gain on disposal of PPE; recall that the group had sold its rights and obligation under the jack-up rig contract (KS Orient Star 1) for US$84.88m in Jun this year. Excluding this, we estimate a recurring PATMI of S$3.2m in the quarter. For FY14, we are projecting net profit of S$53.3m and recurring PATMI of S$8.0m. KSE is now trading at 0.64x P/B and we are seeing value in the stock. Based on 0.8x FY14F P/B, our fair value estimate is S$0.58, from which we see a 25% upside from current levels. The stock has been trading at a historical average of 1.0x P/B in the past three years and 0.75x P/B in the past year. Upgrade to BUY on valuations.

2Q14 results boosted by one-off item
KS Energy (KSE) reported a 44.1% YoY rise in revenue to S$59.8m and net profit of S$46.7m in 2Q14 compared to S$1.5m in 2Q13. Earnings were boosted by a S$54.4m gain on disposal of PPE; recall that the group had sold its rights and obligation under the jack-up rig contract (KS Orient Star 1) for US$84.88m in Jun this year. Excluding this, we estimate a recurring PATMI of S$3.2m in the quarter. For FY14, we are projecting net profit of S$51.5m and recurring PATMI of S$8.0m. Revenue from the drilling business grew with the commencement of charter contracts in Indonesia and Vietnam. Gross profit margin after direct depreciation was 33.7% vs 19.5% in 2Q13.

Still looking to expand drilling fleet
Besides the jack-up rig that the group sold in 2Q14, KSE still has another jack-up rig from Cosco that is on order (delivery in 4Q14), as well as another rig under construction at Shanghai Zhenhua Heavy Industries (delivery in 2016, with option for one more). The KS Java Star 2 has started work in May for Vietsovpetro, contributing to half a quarter’s revenue in 2Q14. On the flip side, two land rigs faced a temporary halt of work in Kurdistan due to tensions in the region, as workers’ safety is the priority now.

Upgrade to BUY on valuations
The firm is still finding its footing in terms of earnings, but given that KSE is now trading at 0.64x P/B, we are seeing value in the stock. Based on 0.8x FY14F P/B, our fair value estimate is S$0.58, from which we see a 25% upside from current levels. The stock has been trading at a historical average of 1.0x P/B in the past three years and 0.75x P/B in the past year. Of the group’s total assets of S$967.5m in 1H14, the carrying value of rigs comprise 58% (unlikely to see any more impairments), followed by joint ventures at 14% (mainly attributed to the 55.35% interest in KS Distribution Pte Ltd) and cash at 13%, with the remaining being trade receivables and other assets. Upgrade to BUY on valuations.

KS Energy

OCBC on 16 Aug 2013

KS Energy (KSE) reported a 29.4% YoY rise in revenue to S$196.2m and a net profit of S$1.6m in 2Q13 vs. S$0.7m in 2Q12, such that 1H13 revenue and net profit accounted for 54% and 42% of our full year estimates, respectively. Gross profit margin was lower at 22.8% in 2Q13 compared to 27.5% in 2Q12, as the distribution division had executed more larger-scale projects that had comparatively lower margins. Looking ahead, management believes that the distribution business will continue to be an important contributor the group’s overall performance this year. For next year, more jack-up rigs should join the fleet. We are positive on KSE’s strategy to focus on anchoring its business in Indonesia and other parts of SE Asia, from where it can continue to grow to the rest of Asia. However, the group remains in a mode of recovery and time will be needed for more significant leaps in earnings. Maintain HOLD with S$0.50 fair value estimate.

Still recovering
KS Energy (KSE) reported a 29.4% YoY rise in revenue to S$196.2m and a net profit of S$1.6m in 2Q13 vs. S$0.7m in 2Q12, such that 1H13 revenue and net profit accounted for 54% and 42% of our full year estimates, respectively. Gross profit margin was lower at 22.8% in 2Q13 compared to 27.5% in 2Q12 and 23.3% in 1Q13, and this is because the distribution division had executed more larger-scale projects that had comparatively lower margins.

Update on assets
After the disposal of KS Titan 2 in 1Q13, KSE currently has three offshore jack-up rigs, seven land rigs and four workover rigs. In addition, it has two jack-ups under construction at Cosco and another jack-up rig under construction (announced 4 Jun 2013, delivery 1Q14). Work for the Atlantic Rotterdam will continue till end Sep or early Oct this year.

Distribution remains the mainstay
Looking ahead, management believes that the distribution business will continue to be an important contributor the group’s overall performance this year. Indeed, besides undertaking maintenance, repair and operations (MRO) work, the group is executing projects which are larger in scale. This division contributed to 78.7% of total revenue in 1H13. For next year, drilling should contribute more to the group’s earnings as more jack-up rigs join the fleet. No charter contracts have been announced for these assets yet.

Maintain HOLD
We are positive on KSE’s strategy to focus on anchoring its business in Indonesia and other parts of SE Asia, from where it can continue to grow to the rest of Asia. However, the group remains in a mode of recovery and time will be needed for more significant leaps in earnings.
Maintain HOLD with S$0.50 fair value estimate, based on 0.85x FY13/14F NTA.

KS Energy

OCBC on 17 May 2013

KS Energy (KSE) reported a 27.6% YoY rise in revenue to S$153.4m and a net profit of S$1.1m in 1Q13, vs a net loss of S$315k in 1Q12. Though the group’s operating profit went into the red again after four previous quarters in the black, we understand that operating profit would have been about S$8.3m had it not been for a one-off foreign exchange loss from the Titan 2 disposal. We estimate core net profit of about S$0.4m in 1Q13. Overall, the group expects business and operating conditions this year to “remain similar” to 2012. We review the valuations of KSE’s closest comparables on the SGX, and note that the average P/Book valuation is about 0.7x. We ascribe a ~20% premium to arrive at a 0.85x P/Book for KSE due to its integrated operations which are larger in scale in comparison to some of its peers. As such, our fair value estimate falls to S$0.50, based on 0.85x FY13/14F NTA. Maintain HOLD.

Core net profit of S$0.4m in 1Q13
KS Energy (KSE) reported a 27.6% YoY rise in revenue to S$153.4m and a net profit of S$1.1m in 1Q13, vs a net loss of S$315k in 1Q12. Though the group’s operating profit went into the red again after four previous quarters in the black, we understand that S$5.8m of the group’s “other operating expenses” relates to one-off foreign exchange losses from the disposal a jointly-held asset. Excluding this, operating profit would have been ~S$8.3m. Meanwhile, about S$6.5m of the group’s share of results of jointly controlled entities relates to the disposal gain. Hence the net impact from the disposal is ~S$0.7m. We hence estimate core net profit of about S$0.4m in 1Q13.

Update on assets
The jointly owned asset that was sold was the KS Titan 2. It was disposed for US$42m (~S$52m), and the buyer was Hercules Oilfield Services. With this development, KSE currently has three offshore jack-up rigs seven land rigs and four workover rigs. In addition, it has two jack-ups under construction at Cosco. The first is expected to be delivered around end of this year or early next year, and the second one about five months later.

Lowering fair value; maintain HOLD
Looking ahead, management believes that the distribution business will continue to be an important contributor the group’s overall performance this year. Overall, the group expects business and operating conditions this year to “remain similar” to 2012. We review the valuations of KSE’s closest comparables on the SGX, and note that the average P/Book valuation is about 0.7x. We ascribe a ~20% premium to arrive at a 0.85x P/Book for KSE due to its integrated operations which are larger in scale in comparison to some of its peers. As such, our fair value estimate falls to S$0.50, based on 0.85x FY13/14F NTA. Maintain HOLD.

KS Energy

OCBC on 14 Mar 2013

KS Energy (KSE) recently announced that it will undertake a renounceable underwritten rights issue to raise gross proceeds of about S$42.1m. The last day for the trading of “nil-paid” rights is this Wed (20 Mar 2013). The group also earlier announced that it will issue S$45m in principal amount of new convertible bonds. Together with internal funds, KSE has more than sufficient funds to satisfy the early redemption of its old convertible bonds. With this resolved, we believe that an earlier overhang on its stock should be cleared with these developments. After obtaining more details from management, we fine-tune our estimates, and maintain our HOLD rating with a revised fair value estimate of S$0.70, based on 1.2x FY13/14F P/NTA.

Wed is last day of rights trading
KS Energy (KSE) recently announced that it will undertake a renounceable underwritten rights issue to raise gross proceeds of about S$42.1m – the company is offering up to 111.65m new ordinary shares at an issue price of S$0.41 for each rights share, on the basis of one rights share for every four existing shares. The last day for the trading of “nil-paid” rights is this Wed (20 Mar 2013). 

S$45m new convertible bonds issue
KSE also earlier announced that it has entered into a purchase agreement with Oversea-Chinese Banking Corporation Ltd (OCBC) and TAEL One Partners Ltd (TAEL One) for the proposed issue of new convertible bonds. KSE will issue S$45m in principal amount of new convertible bonds, of which OCBC will subscribe for S$30m and TAEL One the remaining S$15m. The initial conversion price is S$0.83/share, and the maturity date is three years later, on or about 21 Mar 2016. 

Sufficient funds for early redemption of old convertible bonds
As at 6 Mar 2013, bondholders of KSE’s earlier issue of convertible bonds (due 2015, but early redemption Mar 2013) have tendered notices for an early redemption. 70% of the S$107m in principal amount of the convertible bonds are being redeemed, hence KSE will have to prepare S$76.125m in funds. This will be satisfied by: 1) S$40.9m from the rights issue, 2) S$30m from the issue of new convertible bonds and 3) S$5.2m from internal resources. OCBC and TAEL One currently hold S$28.5m and S$33.5m in principal amount of the convertible bonds due 2015, respectively. 

Early redemption issue resolved; overhang over
We are encouraged to see that the group has resolved the early redemption issue of its old convertible bonds, and believe that an earlier overhang on its stock should be cleared with these developments. After obtaining more details from management, we fine-tune our estimates, and maintain our HOLD rating with a revised fair value estimate of S$0.70, based on 1.2x FY13/14F P/NTA.

KS Energy

OCBC on 12 Mar 2013

KS Energy (KSE) recently announced that it will undertake a renounceable underwritten rights issue to raise gross proceeds of about S$42.1m. The company is offering up to 111.65m new ordinary shares at an issue price of S$0.41 for each rights share, on the basis of one rights share for every four existing shares. The group will also be issuing S$45m worth of new convertible bonds to OCBC and TAEL One Partners. This ensures that KSE will have sufficient funds for the early redemption of its earlier issue of convertible bonds. We have been highlighting the early redemption option of KSE’s convertible bonds and the group has finally resolved this issue. With the increase in share base due to the rights issue, we lower our fair value estimate to S$0.64 (prev. S$0.78), still based on 1.2x FY13F NTA/share. Maintain HOLD.

Rights issue to raise net proceeds of S$40.9m
KS Energy (KSE) recently announced that it will undertake a renounceable underwritten rights issue to raise gross proceeds of about S$42.1m, or S$45.8m if all its convertible bonds (excluding those held by the undertaking shareholder and relevant bondholders) are converted into new shares. The company is offering up to 111.65m new ordinary shares at an issue price of S$0.41 for each rights share, on the basis of one rights share for every four existing shares. 

Issuing S$45m new convertible bonds 
KSE also announced that it has entered into a purchase agreement with Oversea-Chinese Banking Corporation Ltd (OCBC) and TAEL One Partners Ltd (TAEL One) for the proposed issue of new convertible bonds. KSE will issue S$45m in principal amount of new convertible bonds, of which OCBC will subscribe for S$30m and TAEL One the remaining S$15m. The initial conversion price is S$0.83/share, and the maturity date is three years later, on or about 21 Mar 2016. 

Sufficient funds for early redemption of old convertible bonds
As at 6 Mar 2013, bondholders of KSE’s earlier issue of convertible bonds (due 2015, but early redemption Mar 2013) have tendered notices for an early redemption, within our expectations. 70% of the S$107m in principal amount of the convertible bonds are being redeemed, hence KSE will have to prepare S$76.125m in funds. This will be satisfied in the following ways: 1) S$40.9m from the rights issue, 2) S$30m from the issue of new convertible bonds and 3) S$5.2m from internal resources. OCBC and TAEL One currently hold S$28.5m and S$33.5m in principal amount of the convertible bonds due 2015, respectively. 

Lowering fair value estimate to S$0.64
We have been highlighting the early redemption option of KSE’s convertible bonds and the group has finally resolved this issue. With the increase in share base due to the rights issue, we lower our fair value estimate to S$0.64 (prev. S$0.78), still based on 1.2x FY13F NTA/share. Maintain HOLD.

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.

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.

KS Energy

OCBC on 16 May 2012

KS Energy (KSE) reported a 5.6% fall in revenue to S$120.2m and a net loss of S$315k in 1Q12 vs. a net loss of S$8.3m in 1Q11. Revenue was within our expectations, accounting for 22.3% of our full year estimates. We estimate core net loss of S$10.5m in the quarter, close to our full year net loss forecast of S$11.5m. The group’s convertible bonds may be redeemed by bondholders in Mar 2013, but KSE has proven adept at raising funds from investors and partners. Hence we would not be surprised if there are news of further tie-ups in the near future. In line with recent weakness in market sentiment which has impacted valuations of the broader industry, we lower our peg from 1.5x to 1.4x FY12F NTA, such that our fair value estimate slips to S$0.85 (prev. S$0.91). Maintain HOLD.

1Q12 net loss narrows
KS Energy (KSE) reported a 5.6% fall in revenue to S$120.2m and a net loss of S$315k in 1Q12 vs. a net loss of S$8.3m in 1Q11. Revenue was within our expectations, accounting for 22.3% of our full year estimates. We note, however that there was a one-off gain of S$10.6m due to a reversal of fair value loss on an option relating to KS Endeavor; excluding that we estimate core net loss of S$10.5m in the quarter, close to our full year net loss forecast of S$11.5m.

Costs mostly stable
Revenue from the distribution business, which accounted for 71.1% of total revenue, saw a 3.5% drop in revenue in the last quarter, while the drilling division rose 40.2% YoY as more assets were chartered. Costs remained mostly stable except for a significant increase in direct depreciation charges due to capital assets commencing work on their charters as well as accelerated depreciation on a rig.

Convertible bonds with redemption option
The group’s convertible bonds (principal amount ~S$100m) have an option by bondholders who may redeem the bonds in Mar 2013. Management has been “weighing the various options available 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 are news of further tie-ups in the near future.

Restructuring ongoing
Business restructuring in the distribution segment is still ongoing, which will be a gradual process. Besides integration of different IT systems and operational procedures, there also has to be the amalgamation of employees from different companies and hence different working cultures. In line with recent weakness in market sentiment which has impacted valuations of the broader industry, we lower our peg from 1.5x to 1.4x FY12F NTA, and as such our fair value estimate slips to S$0.85 (prev. S$0.91). Maintain HOLD.

KS Energy

OCBC on 1 Mar 2012

KS Energy (KSE) reported a 3.3% fall in revenue to S$492.7m and a net loss of S$78.8m in FY11 vs. a net loss of S$98.4m in FY10. Revenue was within our expectations but the net loss was greater than expected, impacted by one-off items and higher finance costs. We estimate core net loss of about S$40.6m for FY11. Most of KSE’s core assets are chartered, and the distribution business is still providing a steady stream of earnings. The group’s performance has also improved in terms of narrowing its net loss but we are still unsure when we can see a return to profitability. Based on 1.5x FY12F NTA, we maintain our fair value estimate of S$0.91 and HOLD rating on the stock due to limited upside potential.

FY11 results impacted by one-off items
KS Energy (KSE) reported a 3.3% fall in revenue to S$492.7m and a net loss of S$78.8m in FY11 vs. a net loss of S$98.4m in FY10. Revenue was within our expectations but the net loss was greater than expected, mainly due to 1) stock provisions of S$15.3m, 2) an S$18.6m expense for a non-core capital equipment asset to bring it in line with expected realizable value, and 3) higher finance costs. The S$15.3m stock provision is an allowance for inventory obsolescence with a new inventory policy in the distribution division. As for the S$18.6m expense, we understand that it is mainly attributed to the Atlantic Rotterdam; the group’s assets undergo impairment tests at the end of each year. Excluding one-off items, we estimate core net loss of about S$40.6m for FY11.

Update on KS Endeavor
Due to the fire incident in Jan this year, KS Endeavor (50%-owned by KS Drilling) has been declared an actual total loss by the insurers who have to-date made a payment on account of 96% of the insured sum, which we estimate to be less than US$200m. However, as investigations are ongoing, KSE is unable to assess the full impact of the incident.

Still no blue skies yet
Most of KSE’s core assets are chartered (Discoverer 2 is seeking a contract), and the distribution business is still providing a steady stream of earnings. The group’s performance has also improved in terms of narrowing its net loss but we are still unsure when we can see a return to profitability. Meanwhile, business restructuring in the distribution segment is still ongoing, which will be a gradual process. Based on 1.5x FY12F NTA, we maintain our fair value estimate of S$0.91 and HOLD rating on the stock due to limited upside potential.