• Operationally stable
• De-rating of broader sector
• Downgrade to HOLD

3Q14 PATMI affected by one-off payment

KS Energy (KSE) reported a 34.2% YoY rise in revenue to S$58.5m and a net loss of S$0.6m in 3Q14 vs. a PATMI of S$0.2m in 3Q13. This brings 9M14 PATMI to S$46.4m, boosted by a rig sale in 2Q14. Core PATMI in 9M14 is estimated to be about S$3m, slightly below our expectations. Profit after tax in 3Q14 was a respectable S$3.3m but PATMI slipped due to the reallocation of profits to shareholders from 80% of the profits of a subsidiary (KS Drilling) to 50%. This arose due to the one-off payment of preferred dividends by KS Drilling totaling S$8.6m, post the gains on disposal of a rig in 2Q14. If not for the dividend payment, 3Q14 PATMI would have been S$1.9m.

One Kurdistan land rig may remain idle

Revenue growth for the drilling business was flat on a sequential basis as two land rigs were idle due to tensions in Kurdistan. We understand, however, that one of the two land rigs has resumed work, while visibility is poor for the second rig.

Waiting for charter contract for Cosco rig

The group is also taking delivery of a jack-up rig from Cosco in 4Q14 but there has not been any official announcement of a charter contract yet. Should there be a contract with favourable rates, the group should see a positive impact on next year’s earnings, but given the tight timeline we prefer to assume a conservative half a year’s contribution to earnings in 2015, not forgetting there may be depreciation costs should the rig remain idle prior to deployment.

Lowering fair value, wait for more visibility post 4Q

We like that KSE is seeing operationally stable quarters, but with the fall in oil prices which could potentially lead to lower charter rates during contract renewals or maybe even rig impairments later, and together with the recent de-rating of the broader sector, we lower our peg from 0.8x to 0.65x P/B, resulting in a lower fair value estimate of S$0.48 (based on FY15F book). Downgrade to HOLD.

Source: OCBC Research - 18 Nov 2014