Kim Heng Offshore & Marine - OCBC Investment 2016-05-03: Preparing for a prolonged downturn

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KIMHENG OFFSHORE&MARINE HLDLTD 5G2.SI 

Kim Heng Offshore & Marine: Preparing for a prolonged downturn

• Net loss in 1Q16
• Putting capex on hold
• Seeking new markets

Net loss of S$1.7m in 1Q16

• Kim Heng Offshore & Marine reported a 46% YoY fall in revenue to S$8.7m and a net loss of S$1.7m in 1Q16 vs. net profit of S$1.1m in 1Q15. This was below our expectations as rig projects continued to be delayed and the number of rigs serviced by the group was sequentially lower than a quarter ago. 
• Compared to 1Q15, there were also no vessel newbuilds. 
• The group’s gross profit margin, however, remained comparable at 33.1% vs. 30.1% in 1Q15 and 35.0% in 4Q15. 
• As for the crane leasing business, revenue remained relatively stable about S$1.2-1.3m in 1Q16.

Putting capex on hold; cost-cutting too

• Given the poor industry outlook, the group plans to put on hold new yard capex at its 9 Pandan Crescent yard. Having more or less completed its yard capex for 48 Penjuru Road, new spending for this year is likely to be less than $10m in total. 
• As of end 1Q16, the group was in a net cash position of S$5.1m, and it will seek to conserve cash.

Seeking a diversification strategy

• Having been in the offshore and marine industry over four decades, the group is intently aware of the effects of a prolonged downturn in the industry. 
• Cost-cutting plans are underway, and some staff retrenchment has taken place, in line with general industry trends. 
• It is also exploring new markets in the infrastructure, power generation and water treatment industries where it can leverage on existing strengths. 
• The group has also expanded its range of equipment and machineries to include crawler cranes, lorry cranes and mobile cranes, so as to enable it to more profitably undertake a wide variety of maritime and marine infrastructure projects.

Maintain HOLD

• Despite the poor operating environment, Kim Heng still managed to generate S$2.1m cash from operating activities in FY15 and S$1.0m in 1Q16, which is commendable compared to its peers in the industry. 
• However, the outlook for the sector remains dim; we tweak our earnings estimate and our fair value drops from S$0.096 to S$0.093 (0.8x FY16F book). 
• Maintain HOLD.

Low Pei Han CFA OCBC Securities | http://www.ocbcresearch.com/ 2016-05-03

OCBC Securities SGX Stock Analyst Report HOLD Maintain HOLD 0.093 Down 0.096