Technics Oil & Gas - Losses Widen Rapidly

kiasutrader

Publish date: Mon, 02 Dec 2013, 05:34 PM

TGH posted a SGD8.6m loss in 4Q and a record SGD9.9m loss for FY13, below our already lowered estimates. The negative FY13 EBITDA may hamper its ability to borrow or issue notes, which is necessary to build its new capital-intensive asset-leasing business. Its core fabrication business remains weak amid a glut in global yard space and a dearth of new orders. Maintain SELL, with lower SGD0.58 TP.

Core operations collapse, dividend omitted. FY13 revenue sank 73% y-o-y to SGD41.0m, partly due to the deconsolidation of the Norr Offshore Group (NOG, 5279 TT, NR), but the 44% q-o-q fall is more worrying. This led to a surprise gross loss of SGD1.9m in 4Q13. No dividend was declared this year, as we had expected.
No future earnings visibility. TGH stopped updating on its orderbook in 4Q12 and this trend looks to continue. The low volume of contracts won in the last 12 months amid a global glut of fabrication yard space and intense price competition cloud TGH's outlook. We forecast breakeven core profits going forward while highlighting the downside risks.
Still at a premium on rapidly-eroding book value. TGH's ROE was at -17% this year, with the bulk of the loss incurred in 4Q13. We expect a one-off gain from the disposal of NOG in FY14, but this has been priced into the stock, which is still trading at 2.6x P/BV. With the shift towards asset-heavy compressor-leasing, it should gravitate towards the 0.7x-2x P/BV range, where other capital-heavy oil & gas players are trading at.
Do not expect special dividend from NOG disposal. TGH may have breached the EBITDA covenants on its borrowings (97% of which are short-term), and future fund-raising may prove difficult. The disposal of NOG will bring in the funds necessary to grow its compressor-leasing business but this will potentially preclude a special dividend.
SELL. Market still overly optimistic on disposal value. NOG is now trading at a 16x P/E in Taiwan, but TGH's share price implies a 24x disposal P/E on higher assumed earnings. Our SOP-based SGD0.58 TP assumes a 15x disposal P/E and a 2.3x P/BV on its core book value.

Still trades at too high a P/BV with no turnaround in sight. Having reported its largest-ever loss with little earnings visibility and no turnaround in sight, TGH should not be trading around its 5-year average P/BV. A more reasonable multiple would be at -1 SD below the mean, which is 2.3x P/BV. Key derating catalysts would be the weak 1Q14 results, or a sustained lack of engineering, procurement, construction and commissioning (EPCC) contracts. Note that compressor-leasing contracts will not begin contributing until a year later , due to the 8-10 month asset construction period.

SOP valuation dovetails with simple P/BV methodology. Our SOP valuation assumes that NOG will improve its earnings from SGD4.3m this year to SGD5.5m next year, and that the Taiwanese market will pay a 15x forward P/E based on management guidance. Note that if the Taiwanese market will only pay a 15x trailing P/E, the SOP-based TP becomes SGD0.55, which is exactly identical to the simple 2.3x P/BV-based TP.

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Company Profile
Technics Oil & Gas is a full-service integrator of compression systems and process modules for the global offshore oil and gas sector.

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Source: RHB

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