Carimin Petroleum Bhd FV: RM1.12 (+2%) Orderbook Replenishment is Key

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1 A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: IPO NOTE Tuesday, October 28, 2014 FBM KLCI: 1, Sector: Oil & Gas Carimin Petroleum Bhd FV: RM1.12 (+2%) Orderbook Replenishment is Key THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* MAIN Market Listing Not Rated TA Research Team Coverage Tel: kyliechan@ta.com.my Carimin Petroleum Bhd (Carimin) is an O&G contractor that provides hook-up and commissioning (HUC), platform maintenance, and manpower services. Carimin was one of the winners of Petronas Pan Malaysia HUC contract in The bulk (89%) of Carimin s RM900mn orderbook comprises of this contract currently. Therefore, our primary concern is that the group may emerge as a one trick pony if it doesn t manage to secure sizeable new contracts outside of HUC. To recap, there will be no new tenders for local HUC contracts until expiry of the Pan Malaysia umbrella contract in Nevertheless, we understand that the group is actively bidding for maintenance projects to replenish its orderbook. In fact, we believe the group stands a fair chance to secure a package from Petronas upcoming RM1.5bn Pan Malaysia Inspection, Repair, and Maintenance (IRM) contract. On top of that, there will also be earnings upside from:- 1) additional work orders for Pan Malaysia HUC, 2) more vessel acquisitions, 3) diversification into marine services, and 4) yard upgrade. We arrive at a fair value (FV) of RM1.12 for Carimin based on 12.0x CY15 P/E. This is inline with its peers average, and at a 6% discount to the mean of its peers in the HUC & Brownfield segment. The recent weakness in crude oil price could cap near term share price performance. Nonetheless, we reiterate the potential of the stock price if management delivers on contract replenishment. (1) STATISTICS OF IPO No. of Units (mn) % of Enlarged Share Base % of IPO shares New Public Issue % 91% Offer for Sale % 9% Total % 100% Enlarged Share Cap % Public % 91% - Malaysian Public % 18% - Private Placement % 69% - Eligible Persons % 5% Offer % 9% Share Information Listing MAIN Market Enlarged Share Capital (mn) Market Cap (RM mn) Par Value (RM) 0.50 Issue Price (RM) 1.10 Oversubscription rate n.a. Estimated free float (%) 58 Listing Date 10 Nov 2014 Timetable Event Opening of the IPO 23 Oct 2014 Closing of the IPO 29 Oct 2014 Balloting of Applications 31 Oct 2014 Allotment of Shares 6 Nov 2014 Listing 10 Nov 2014 Ratio & Analysis FY15 FY16 Net (Debt)/Equity (x) ROA (%) ROE (%) NTA/Share (RM) P/NTA (x) Utilisation of Proceeds Purchase of OSV 53 Development of yard 18 Repayment of bank borrowings 12 Working Capital 12 Listing Expenses % Figure 1: Utilisation of IPO Proceeds Amount (RM mn) % of Total Purchase of Offshore Support Vessel % Development of minor fabrication yard % Repayment of bank borrowings % Working Capital % Listing Expenses 3.5 5% Total Gross Proceeds % Page 1 of 7

2 (2) BACKGROUND HUC Contractor with Own Vessels. Carimin primarily provides offshore HUC, platform maintenance and upgrading, and minor fabrication services (Figure 1). Other businesses include manpower supply for the O&G industry, and equipment rental. Carimin owns a 5,100 bhp Anchor Handling Tug Supply (AHTS) vessel and also has 14% stake in an Accommodation Work Boat (AWB). Carimin s clients comprise of PSC (Production Sharing Contract) operators and other O&G contractors in Malaysia. The group s largest customers include Petronas Carigali (60% of FY14 revenue) and Petrofac (12%). Figure 1: Revenue Streams Petronas is Main Revenue Contributor. The HUC segment is Carimin s largest revenue contributor (FY14: 65%), followed by manpower services (35%) and equipment rental (1%) (Figure 2). In a nutshell, the HUC process involves inter-connecting and interfacing various structures (eg. steel structures, piping and equipment), processes, and control systems for offshore platforms. Meanwhile, commissioning involves testing, and commissioning of all installations to ensure the platform is ready for production. Carimin was established in 1989 and ventured into the HUC space in Figure 2: FY14 Revenue Breakdown Source: Company Pan Malaysia Contract Forms Bulk of Orderbook. Carimin s current outstanding orderbook (Figure 3) amounts to RM900mn whereby the bulk (89%) comprises of the Pan Malaysia HUC contract. To recap, in Nov 2013, Petronas and its PSCs awarded one of 13 packages from the RM10bn 5-year Pan Malaysia HUC and Topside Major Maintenance (TMM) contract to Carimin. The other package winners include SapuraKencana, Dayang Enterprise, Petra Energy, PBJV, and Sigur Ros. For its initial package valued at RM900mn, Carimin will provide infill drilling, facilities upgrading, platform modification, host tie-in and pipeline replacement for platforms offshore Peninsular Malaysia. The contract s tenure is from May , and Carimin recently commenced works in Jan Page 2 of 7

3 Figure 3: Outstanding Orderbook Contract Estimated Value (RM mn) Pan Malaysia HUC Manpower Services Total Taking Delivery of New Vessel in After securing the Pan Malaysia contract, Carimin acquired an AHTS, Carimin Airis, in Nov 2013 to work on the project. SK Deep Sea, an AWB (14% stake), is also currently working on the same contract. Both vessels will be joined by Carimin s new 200-pax AWB, Carimin Acacia, by Jun According to management, Carimin has deployed 5 vessels for the project currently (2 owned, 3 chartered-in). The number of vessels deployed at a given time is dependent on the client s requirement, and therefore may fluctuate, particularly during monsoon season. (3) STRENGTHS Expansion Plans Provide Uplift in Earnings. Carimin s expansion plans in the pipeline include: 1) upgrade of minor fabrication yard at Kemaman, Terengganu, 2) acquisition of a new AWB, Carimin Acacia, 3) diversification into marine services, and 4) expansion of equipment rental services. These plans will provide Carimin with a much needed earnings kicker given the black sky scenario whereby the group is unable to secure new contracts to replenish its orderbook. Long Term Earnings and Potential Upside from Pan Malaysia. Carimin s earnings for the next 4 years until 2018 are secured on the back of its Pan Malaysia package. Management subtly alluded that based on its experience in executing contracts for Carigali, there is potential upside to the original contract value. Our channel checks reveal the same whereby winners of Petronas Pan Malaysian packages are confident of securing additional ad-hoc jobs outside of their contracted job scope. In fact, these extra works carry higher margin given that they are needed on ad-hoc basis. Diversification to Marine Services. Carimin intends to provide bareboat/time charter of OSVs by 2015 as part of its diversification strategy. In fact, the group plans to charter-out Acacia during periods of low utilisation. Therefore, we believe that Carimin will likely expand its OSV fleet to cater for both the Pan Malaysia contract and its OSV venture. In our forecasts, we have factored-in the purchase of one 5,000 bhp AHTS for the group in FY16. Postacquisition, the group s FY16F net gearing is estimated to hover at a manageable level of 1.2x. New Vessel & Yard Upgrade Will Boost Margin. In Jun 2015, Carimin will take delivery of Carimin Acacia, and deploy it for the Pan Malaysia contract. Deployment of in-house vessels enables Carimin to reduce earnings leakages from chartering-in 3 rd party vessels. On top of that, ownership of vessels provides Carimin an advantage when bidding for future HUC contracts. In addition, Carimin will partially use IPO proceeds to build new facilities and purchase new equipment for its minor fabrication yard measuring 1.8 acres. The yard is used to fabricate small structures and equipment for use at the group s HUC projects. Similarly, use of internally fabricated components provides a kicker to margins. Page 3 of 7

4 (4) WEAKNESSES No More New HUC Jobs Until Management alluded that there will be no new HUC tenders in the market until expiry of the existing Pan Malaysia contract in This is on the back of Petronas policy to consolidate all local HUC jobs for the next 5 years under one umbrella contract. This implies that Carimin needs to secure other service contracts outside of HUC to grow its orders log. The group risks ending up as a one trick pony with a depleted orderbook if it fails to secure new contracts. But Could Win Pan Malaysia IRM. Nevertheless, we understand that the group is actively tendering for brownfield platform system maintenance and upgrading projects. In addition, the group is also considering O&G engineering and procurement contract bids. Given Carimin s longstanding (17 years) track record with Petronas, we do not discount that the group stands a formidable chance to secure a package for the upcoming Pan Malaysia Inspection, Repair, and Maintenance (IRM) contract. We expect the IRM contract could potentially be awarded in 2015 with an estimated total value of RM1.0bn-1.5bn. Crowded Space in HUC. It is a crowded space in the HUC segment whereby Carimin s competitors include Coral Alliance, Sigur Ros, Dayang Enterprise, Petra Energy, SapuraKencana, Tanjung Offshore etc. Carimin s listed competitors have an advantage given significantly larger fleet size and balance sheet. Nevertheless, we do note that Carimin managed to secure the Pan Malaysia contract despite lacking in scale. Lumpy Earnings Profile. As at end-sept 2014, Carimin has merely recognized 10% (RM92.4mn) of Pan Malaysia s total contract value (9 months recognition). According to management, the slower than expected recognition is given that this contract is on call-out basis. This implies that earnings recognition will be lumpy, depending on the amount of work orders released by the client. As such, we expect lumpy earnings for the group over the duration of the contract. (5) INVESTMENT SWOT Strengths Locked-in earnings for next 4 years with Pan Malaysia contract. Stable recurring income from manpower services established No. 2 player. Earnings upside from diversification into new segments, (i.e. maintenance and marine services). Margin upside from utilising own vessels and yard upgrade. Opportunities New OSV contracts from diversification into marine services. Orderbook replenishment from maintenance contract bids. Formidable contender for Petronas RM1.0bn-1.5bn Pan Malaysia IRM contract. Weaknesses Dependent on one single contract (Pan Malaysia HUC) from one customer currently. Risks being one trick pony with depleted orderbook this is given no new HUC contracts in the market until 2018 (expiry of Pan Malaysia HUC). Threats Crowded space in the HUC segment whereby listed competitors have larger fleet size and balance sheet. Page 4 of 7

5 (6) EARNINGS FORECASTS FY15 Boosted by Airis & Chunky Pan Malaysia Sales. We forecast revenue to surge 26% for Carimin in FY15 underpinned by: 1) chunky 24% (9MCY14: 10%) recognition of the Pan Malaysia total contract value after a slow FY14, and 2) 3- month charter revenue from both Airis AHTS (DCR: RM5.50/bhp) and Acacia AWB (DCR: RM80k) during monsoon season. As highlighted earlier, we expect lumpy recognition of sales billings for the Pan Malaysia project. We assumed a slight gross margin improvement of 24 b.p.s for Carimin in FY15 on the back of: 1) delivery of Acacia AWB in Jun 2015, and 2) partial realisation of efficiency gains at the minor fabrication yard (following optimisation program). Bottomline growth of 20% for Carimin in FY15 is slightly offset by increased finance costs following drawdown of term loans and new vessel financing for Airis AHTS. New OSV Uplifts FY16. For FY16, we expect topline to register growth of 15%, on the back of: 1) higher recognition of 29% (FY15: 24%) of Pan Malaysia s total value, 2) full-year marine charter contribution from a newbuild AHTS (DCR: RM5.56/bhp) at 80% utilization. We forecast EBITDA margin to receive a boost of 7 bps on the back of full year utilisation of Carimin Acacia for Pan Malaysia. However, net profit growth of 12% is weighed down by higher finance costs as we assume Carimin takes-up 80% vessel financing for its newbuild AHTS. Figure 4: FY15-16 Earnings Forecasts FYE 30 Jun (RM mn) E 2016F Revenue EBITDA Depreciation (2.4) (3.4) (5.5) (8.5) Net finance cost (0.0) 0.3 (3.7) (5.7) JCEs Pretax Profit Taxation (6.6) (8.8) (9.5) (10.6) MI (2.4) (4.7) (6.5) (7.3) Net Profit Growth Ratios Revenue (%) (11.7) (24.6) EBITDA (%) EPS (%) Margin Gross (%) EBITDA (%) Net (%) Page 5 of 7

6 (7) VALUATION FV of RM1.12 at 12x CY15 P/E. We arrive at a fair value (FV) of RM1.12 for Carimin based on 12.0x CY15 P/E. This is in-line with its peers average, and at a 6% discount to the average of its peers in the HUC & Brownfield segment (Dayang and Petra Energy). The discount is to reflect Carimin s much smaller market cap and order book relative to the latter two. Carimin s size is merely 10%-12% of Dayang and Petra in terms of market cap, whilst its fleet size is smaller too, with its competitors having 8-9 vessels each. We stress that there is potential upside to our estimates and FV if the following catalysts emerge, which we have not factored into our forecasts:- 1) additional ad-hoc jobs with higher margin for Pan Malaysia HUC, 2) the group secures a package from Pan Malaysia IRM contract, and 3) new contracts to replenish orderbook. The recent weakness in crude oil price could cap near term share price performance. Nonetheless, we reiterate the potential of the stock price if management delivers on contract replenishment. Figure 5: Peer Comparison Table Company Price Divd Yield Mkt Cap P/E (x) P/B (x) ROE (%) EV/ EBITDA (x) EPS Growth (%) (%) (RM mn) CY14 CY15 CY14 CY15 CY14 CY15 CY14 CY14 CY14 Dayang Enterprise , Petra Energy Bhd , Perdana Petroleum , Alam Maritim , Uzma Bhd Average Carimin n.m. n.m. n.m. n.m. n.m. n.a. 0.6 Note:- Bloomberg consensus estimates Source: Bloomberg, TA Research Figure 6: Earnings Summary FYE Jun (RM mn) E 2016F Revenue EBITDA EBITDA margin (%) Pretax Profit Net Profit Net Profit Growth (%) EPS (sen) EPS growth (%) PER (x) GDPS (sen) Page 6 of 7

7 (8) APPENDICES Appendix I: Key Management Source: Company Appendix II: Changes in Shareholding Before IPO Post-IPO Tan Sri Dato' Kamaruzzaman Mokhtar Bin Hashim Shatar Abdul Hamid Total Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD (14948-M) MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 7 of 7