• S$54.4m gain on rig disposal
• Still expanding fleet
• Trading at 0.64x book

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.

Source: OCBC Research - 20 Aug 2014