EA Technique: FSO contracts to drive 2015 earnings

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NEWLY listed shipbuilder and marine transport provider EA Technique (M) Bhd expects its contracts for the provision of floating storage and offloading (FSO) vessels to make up 35% to 40% of group revenue this year, compared with some 20% now, says managing director Datuk Abdul Hak Amin.

For the FSO business, EA Technique has a vessel, MT Nautika Muar, operating in the Kayu Manis Oilfield in Bintulu, Sarawak, with three years remaining on the charter contract. The group’s second FSO vessel, MT Fois Nautika Tembikai, is slated for delivery this April to the Tembikai Oilfield in Terengganu under a six-year charter contract.

An FSO vessel is a tanker-based vessel that functions as a semi-permanent offshore storage facility for oil and gas.

“FSO vessels will become our main revenue earner this year, next year and in the future. One FSO vessel can bring in about RM10 million a year in pre-tax profit,” Abdul Hak tells The Edge. He holds an 18% stake in the group while Sindora Bhd, a unit of Kulim (M) Bhd, is the major shareholder with a 50.6% stake.

EA Technique reported revenue of RM155.66 million in the financial year ended Dec 31, 2014 (FY2014), with earnings before interest, taxes, depreciation and amortisation (Ebitda) and net profit of RM59.28 million and RM14.63 million respectively. It was listed on the Main Board of Bursa Malaysia in December 2014.

While EA Technique’s second FSO vessel will boost revenue in this segment, the group had also last month secured an engineering, procurement, construction, installation and commissioning (EPCIC) contract for an FSO vessel for a full field development project in the North Malay Basin.

Based on the group’s filing with Bursa, the EPCIC contract will expire in August 2016 and is worth US$191.8 million (RM701.7 million at the time of writing).

Abdul Hak says the contract was awarded by Hess Exploration & Production Malaysia BV, a vehicle of Hess Corp in the North Malay Basin production sharing contract with Petroliam Nasional Bhd (Petronas).

Hess Corp said last month that it will cut its capital and exploratory budget by 16% to US$4.7 billion due to the fall in crude oil prices. However, it will continue to fund the development in the North Malay Basin.

Petronas too has said that it will cut its capital expenditure by between 15% and 20% this year. But so far, EA Technique has not felt the impact of this.

“Petronas might put some marginal oilfields on hold, but not those that have already taken off. For us, our Tembikai FSO, [Petronas is] going ahead because that is already almost ready. At the moment, we are not affected,” says Abdul Hak.

That said, EA Technique does not expect to take up anymore FSO jobs this year as it does not have the capacity to do so.

The group seems to have timed its projects well as contract flow, amid the poor oil price climate, is expected to be slow for this year at least.

Having fallen more than 50% to below US$50 per barrel since August last year, Brent crude oil prices are now trading just above US$60 per barrel. Abdul Hak expects crude oil prices to hover at US$70 to US$80 per barrel this year.

As EA Technique’s FSO contract flow may slow, the group is focusing more on its port operations. It provides vessels, mooring gangs and harbour tugboats, ranging from 30 to 60 tonne bollard pull.

“Our share [of the Malaysian market] is about 20% to 25% now. So we are looking at 35% to 40% of the market in three to four years,” says Abdul Hak.

He adds that the local market has over 100 tugboats, but many of them are owned by foreign companies.

According to its website, EA Technique has 15 vessels under its port operations. It is building nine tugboats at the moment, with one to be delivered each month up to the end of the year.

“We are looking at another 10 to 12 new tugboats for the Malaysian market. That is a capital expenditure of more than RM200 million over the next three years,” says Abdul Hak.

If EA Technique meets this target, its port operations will contribute over 30% to total group revenue.

“We want to balance our revenue stream,” Abdul Hak says, adding that port operations are less risky and offer the company a 15% margin.

For FY2014, port operations contributed 26% to the group’s revenue, while 74% came from marine transport and offshore storage operations (including FSO vessels, offshore support vessels, liquefied petroleum gas tankers and product tankers, which contribute equal parts to the segment at present).

EA Technique’s revenue in FY2014 rose 28.5% year on year to RM155.66 million, but net profit fell 74% to RM14.63 million. Profit had fallen due to a high base in FY2013 where it made a RM37.5 million gain on disposal of an associate company and received a RM2.9 million share of profit from an associate. Stripping out these gains, EA Technique’s net profit fell a marginal 11.5% from RM16.5 million in FY2013.

The group’s net assets per share stands at 54 sen. This seems to be fairly reflected in its share price, which closed at 54.5 sen last Thursday, giving it a market capitalisation of RM272.16 million.

The stock has fallen some 16% since it listed at 65 sen in December 2014. RHB Research has not rated EA Technique but values the stock at 75 sen, indicating a 37% upside from the current level.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 9 - 15, 2015.