• Looking at next leg of growth
• Core business delivers good returns
• Under-priced at current levels

Long-time player in the O&M industry

With over 40 years of experience, Kim Heng Offshore & Marine Holdings Limited offers a one-stop comprehensive range of products and services that caters to different stages of offshore oil and gas projects from oil exploration to field development and oil production. Its core competencies lie in rig repair and maintenance, refurbishment of rigs, offshore fabrication and supply chain management.

Core business delivers good returns

The group enjoys good relationships with established players in the industry, counting Transocean and Seadrill (amongst others) as a few of its key customers. The ongoing requirement for rig maintenance and repair also means that it is less cyclical than the newbuild business, and ad-hoc jobs with urgent client requirements present opportunities for higher margin work as well. This has allowed the group to deliver ROEs of 30-50% in FY11-13 and ROICs of 27-33% over the same period, and is expected to buttress the group’s earnings as it seeks further avenues of growth.

Seeking next leg of growth

The group used to be entirely controlled by the Tan family, and though it remains a major shareholder with several members of the family in senior management, there is now also the presence of a private equity fund, Credence Partners, that aims to grow with the company. We expect to hear about acquisitions to boost the group’s capabilities (such as in the subsea business), and perhaps an expansion beyond Singapore.

Under-priced; initiate with BUY

We value Kim Heng based on 11.5x FY14/15F P/E, close to the industry average for offshore service providers. The group’s proven track record and established relationships with clients lends confidence that it can weather downturns and be a beneficiary during up-cycles. The current outlook for the O&M industry is also positive, and well-executed acquisitions may result in a re-rating of the stock. Initiate with BUY and S$0.34 fair value estimate.

Source: OCBC Research - 9 Jul 2014