TAS Offshore Bhd
(Jan 19, RM0.745)
Downgrade to neutral with a lower target price (TP) of 81 sen from RM1.42:  For TAS Offshore’s (TAS) first half of financial year 2015 (1HFY15) ending May, revenue surged 62% year-on-year (y-o-y) to reach 45% of our full-year target, but its core net profit declined 21% due to lower margins.

Downgrade to “neutral” with a lower 81 sen TP (8.7% upside) from RM1.42, pegged to eight times FY16 price-earnings ratio (PER).

With no material contract announcement for the past 10 months and in view of declining oil prices, we lower our FY15 to FY17 net profit forecasts by 21% to 39%.

While TAS Offshore’s 1HFY15 revenue jumped 62% y-o-y to RM127.6 million, coming in at 45% of our full-year target, its core net profit of RM9.6 million (a decline of 21% y-o-y) accounted for 47% of our FY15 target.

The higher topline was mainly due to higher profit recognition upon delivery of five vessels in the first quarter of FY15 (1QFY15), while the lower bottom line was caused by lower margins.

The 2QFY15 core net profit fell 24% to RM4.2 million from RM5.5 million in 1QFY15, led by a 33% quarter-on-quarter drop in revenue to RM51.3 million in the quarter.

The weaker 2Q results were mainly attributed to higher sales recognition of four tugboats and an anchor handling tug supply (AHTS) vessel sold in 1QFY15. Note that there was a reversal of a RM3.3 million impairment loss on trade receivables recognised in 1HFY14.

We are concerned with TAS’ earnings sustainability in FY16 to FY17 as declining oil prices may prompt major oil and gas (O&G) players to slash their capital expenditure spending.

We cut our FY15 to FY17 revenue and net profit forecasts by 10% to 29% and 21% to 39% respectively, assuming lower order book replenishments during that period. This is in view of lower oil prices and potentially lacklustre O&G activities for at least the next one year, coupled with no material contract announcements for the past 10 months.

We roll over our valuation to FY16 and lower our TP to 81 sen from RM1.42, pegged to a lower FY16 PER of eight times, in line with the average PER valuation of shipbuilding companies under our O&G coverage. — RHB Research Institute Sdn Bhd, Jan 19

This article first appeared in The Edge Financial Daily, on January 20, 2015.