Kim Heng Offshore & Marine Hldgs Ltd (KHOM SP) - DBS Research 2016-12-01: Small Mid Caps Radar Explorations

Kim Heng Offshore & Marine Hldgs Ltd (KHOM SP) - DBS Vickers 2016-12-01: Small Mid Caps Radar Explorations KIMHENG OFFSHORE&MARINE HLDLTD 5G2.SI

Kim Heng Offshore & Marine Hldgs Ltd (KHOM SP) - Small Mid Caps Radar Explorations

  • Kim Heng is one of the safer proxies to ride the recovery of O&G activities given its asset light business model, sound balance sheet with only 4% net gearing, and long-standing working relationships with global blue chip names. Valuation is undemanding at 0.6x P/B and could trade closer to its book value of 11 Scts supported by a recovery in the sector.
  • With over 40 years of track record and long-standing relationships with global blue-chip names like Transocean, Noble, Seadrill and McDermott, Kim Heng is a leading integrated O&M service provider that offers comprehensive services including offshore rig repair & maintenance, reactivation/refurbishment of old rigs, block fabrications, newbuilding of pipelay /accommodation vessels and supply chain management.

Kim Heng’s earnings were hit by the collapse in O&G activities. 

  • Revenue plunged 50-60% from the usual S$20- 25m to S$7-9m a quarter in 2016 while gross margins shrunk by nearly 10ppts to the 30% level. As a result, Kim Heng swung into losses of S$1.8m a quarter on average, for the past six quarters. We believe the ongoing oil rebalancing will drive up oil prices and eventually the activity level. The higher rig count bodes well for rig services demand and the turnaround of Kim Heng.
  • Kim Heng’s relatively healthy balance sheet and cash flow are key to survival, in our opinion. 

Operating cash flow is almost at breakeven level. 

  • The strong cash on hand of S$23.3m as at end Sept-2016 provides a comfortable cushion to meet its short term financing obligation - short term loan repayment of S$8m and maintenance capex of S$3-4m pa. 
  • In addition, Kim Heng should also qualify for government assistance – bridging loan of up to S$15m for each O&M group, providing additional liquidity if required.
  • The stock has been bashed down from c.2x P/B to 0.6x P/B currently due to deteriorating earnings outlook amid the oil crisis. We expect oil prices to recover next year, which should eventually turn the business around and bring the stock closer to its book value of 11 Scts. 
  • The re-rating will likely be led by macro indicators – i.e. oil prices, capex and supply/demand datas.
  • Key risks – Oil rebalancing disrupted by the influx of oil supply especially from US shale and/or global recession affecting oil demand, and therefore demand for Kim Heng’s rig services.

Listed on Catalist board with support from prominent investors. 

  • Kim Heng made its debut on SGX Catalist board on 22nd Jan 2014, with the support from prominent institutional funds and individuals like Credence, Havenport, OneEquity SG and CEO of Ezion – Mr Chew Thiam Keng.
  • Kim Heng owns two licensed waterfront shipyard facilities with 137 metres and 68 metres of waterfront respectively. These two waterfront shipyards are valuable assets to the group, not only because they are limited but also because they are equipped with workshops and open yard spaces of more than 50,000 square metres to engage in new construction, fabrication, maintenance and afloat repairs. They provide Kim Heng with the capability to accommodate jackup rigs, offshore vessels and drillships of up to approximately 7 metres draft at zero tide for repair, maintenance and refurbishment works in its shipyards.

Quick turnaround of projects. 

  • While Kim Heng signed master service agreements with key customers, firm orders are placed as and when required by customers. Generally, the group has a 3-6month rolling orderbook visibility.
  • Rig Services and Supply Chain Management accounted for c.85% of revenue in FY15; the remainder came from Vessel Sales and Newbuild which is on an ad-hoc basis.

Tightening belts. 

  • Kim Heng implemented cost control initiatives in May-2016, comprising the reduction of overall compensation by 5-20% across the group with higher reductions applied to senior management and the Board, and workforce rationalising. It will continue to review its cost cutting measures and capex spending.
  • Bulk of the costs is variable costs given its asset-light model.
  • The key cost component is cost of materials, supplies and fabrication costs which accounted for c.55% of total cost of goods sold (COGS). Operating and maintenance cost represent 15% of total COGS while the remaining 30% are other costs such as depreciation, chartered-in cost, rental and crew costs.

Venturing into Iran – the fourth largest oil reserve in the world. 

  • Kim Heng has entered into a non-binding memorandum of understanding (the “MOU”) with the state-owned enterprise - Iran Marine Fund (“IMF’’) on 9 May 2016 to explore the opportunity to set up a strategic partnership.
  • Kim Heng would provide technical expertise and financing to Iranian offshore marine and oil & gas projects relating to: 
    1. Shipbuilding 
    2. Chartering of KHMO’s fleet and marine facilities 
    3. Purchasing of offshore vessels 
    4. Procurement & Supply Chain Management 
    5. Rig Management Services; and 
    6. Maintenance & Refurbishment of structures, facilities & rigs. 
  • The move provides Kim Heng with a new avenue for growth as Iran is in need of foreign investment and expertise to develop its O&G sector post lifting of sanctions. Though, it might come with higher operating risks that need to be carefully accessed and managed.

Target Price: N/A

HO Pei Hwa DBS Vickers | http://www.dbsvickers.com/ 2016-12-01
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998