• Kim Heng posted a 1H14 revenue of S$43.8m and net profit of S$5.5m, a disappointment on both margins and core business
• Key reason for plunge in 2Q14 results was the delays in arrival of customers’ rigs and OSVs
• Current forward commitments estimated to be S$86m, S$40m of which is from a master service agreement (4 rigs). >50% is expected to be recognized as revenue in FY14
• Key re-rating catalysts are clinching of high value turnkey projects, accretive M&A
• Maintained at "BUY” with a revised TP of S$0.29 based a revised FY14 EPS of 2.7 cents and unchanged P/E multiple of 11X.

What is the news?

Kim Heng Offshore & Marine announced its 2Q14 results on 11 Aug 2014. Kim Heng reported a 1H14 revenue of S$43.8m, an increase of 7% y-y but net profit dropped by 32% to S$5.5m. 2Q14 revenue increased 3% y-y but net profit dropped substantially by 66%. The large swings we see are due to 2 factors: (1) delays in arrival of customer rigs (2) lower margins from vessel sales affecting overall margins. Breaking it down on a segmental basis, 1H14 revenue from offshore rigs services was only down 3% against 1H13 due to chartering and towage income doubling which mitigated the 43% decrease in sales of goods. Vessel sales and newbuild revenue grew 392% from sale of 2 barges. GP margins decreased from 42% to 36% on substantially lower margins from vessel sales. Current forward commitments is estimated to be S$86m, S$40m of which is from a master service agreement (4 rigs). >50% is expected to be recognized as revenue in FY14. Kim Heng serviced 68 rigs in FY13 and YTD, they have serviced between 30-40 rigs.

Investment Action

Kim Heng’s share price has been weakened by both the profit guidance and expiry of the 6 month moratorium post IPO. In our initiation, one of the key risks we had highlighted was the poor visibility of their “orderbook” which is of a rolling 3-6 months period, due to their nature of being a service provider. Revenue is therefore lumpy by nature attributable to timing issues. Margins and revenue growth were hit this quarter by delays in arrival of rigs. Management is confident that a significant portion of the S$86m forward commitment will be recognized in FY14. Assuming they can recognize at least 50% excluding other ad-hoc projects, that will bring FY14 revenue above FY13 minimally. We err on the conservative side due to the impact on margins and revenue in 2Q14 and lower our FY14 estimates for revenue/net profit by 6%/14%. Key re-rating catalysts are clinching of high value turnkey projects, accretive M&A. We maintain our rating at "BUY” with a revised TP of S$0.29 based a revised FY14 EPS of 2.7 cents and unchanged P/E multiple of 11X.

Source: Phillip Securities Research - 14 Aug 2014