Monday, July 22, 2013

Triyards : Another yard joins the party (NRA)

Triyards Holdings Ltd
Current Price S$0.71
Fair Value S$0.97
Another yard joins the party

 Initiate coverage with an Overweight recommendation and a $0.97 fair value, based on 7x PER FY14 (30% discount to its peers in the marine and offshore industry to account for its smaller size). Despite its smaller size compared to heavyweights Keppel and Sembcorp Marine, we believe Triyards' specialization and experience in building Self Elevating Units (SEUs or more commonly known as liftboats in North America. Similar to smaller jack-up rigs but are self-propelled) will put the company in a good position to take advantage as these types of vessels gain popularity in regions such as Asia and Africa.


 A mini Keppel Shipyard in the making. Triyards is a fabrication and ship construction company mainly for the offshore and marine industries. It has two yards in Vietnam and one yard in the US. The two yards in Vietnam focus on marine and offshore fabrication works and vessel construction, constructing vessels such as its proprietary SEUs and Offshore Support Vessels, while the Houston, US yard produces equipment such as specialty cranes and A-frames, which are installed on SEUs and OSVs.

 Good track record and experience. It has built a total of six SEUs for clients around the world, all delivered on time and within budget. These SEUs are now operating in regions such as Asia Pacific and the Middle East for oil majors including Shell and Pertamina. It recently commenced construction for two of its latest and largest SEU models, the BH 450. In addition, it has an established track record for building OSVs and construction vessels.

 Expanding around the region. As part of its expansion plan, it is in the process of acquiring an Australian company with a well-sited logistics and supply base within the shipbuilding and marine-related region of Western Australia (WA) for A$6.75m. The site is located near the port of Fremantle, WA’s largest and business general cargo port. The acquisition is expected to be funded by cash and issuance of 8.9m new ordinary shares to the seller. It plans to complete the acquisition by end 2013.

 Repair and maintenance to supplement income. Another segment which will complement its existing business is the completion of its newly commissioned floating dock that will cater mostly to repairs of offshore vessels, and which will begin contributing in 4Q13.

 Oil and gas capex remains robust. Strong growth in demand from non- OECD countries is expected to keep oil prices steady. Infield Systems estimates that offshore oilfield infrastructure capital expenditure will grow by more than 70% for the period 2012-2016 compared to 2007-2011.

Company Background
Triyards Holdings Ltd was listed on 18 Oct 2012 and is 67% owned by SGX listed Ezra Holdings. It is a fabrication and ship construction company mainly for the offshore and marine industries with two yards in Vietnam and one yard in the US. The two yards in Vietnam focuses on marine and offshore fabrication work and vessel construction while the Houston, US yard produces equipment such as specialty cranes and A-frames, which are installed on Self Elevating Units (SEUs) and Offshore Support Vessels (OSVs). It has 2,000 employees as at end FY12 at its Vietnamese yards.

Specialized offshore equipment yard. Its yards in Houston, USA designs and fabricates offshore equipments such as cranes, A-frames and winches. Cranes are subsequently used on its SEUs and on its latest and biggest project, the Lewek Constellation.

Good track record. It has built a total of six SEUs for clients around the world, all delivered on time and within budget to its clients. These SEUs are now operating in regions such as Asia Pacific and Middle East for oil majors including Shell and Pertamina. Adding to its capabilities, two 6,000T oil tankers were built in the group’s shipyards in 2011.

Joining the big boys. The group is one of only three Singapore yards (the other two being Keppel and Sembcorp) capable of designing and building its own proprietary drilling jack-ups and SEUs, with the Class 400 HPHT (high pressure, high temperature) drilling jack-up rig, TDU-400. We note that this is a positive step for the group to differentiate its products and services from other Singapore and China yards that are coming into this space.

Expanding around the region. As part of its expansion plan, it is in the process of acquiring an Australian company with a well-sited logistics and supply base within the shipbuilding and marine-related region of Western Australia for A$6.75m. The site is located near the port of Fremantle, WA’s largest and business general cargo port. The acquisition is expected to be funded by cash and issuance of new ordinary shares to the seller. The acquisition is expected to be completed by end 2013.

SEU, smaller and faster brother of jack-ups. SEUs or more commonly known as liftboats in North America, are self-propelled, multi-purpose and self-elevating vessels. Although they compete against smaller jack-up rigs and construction barges, SEUs have cost advantages such as being self-propelled, which cuts the costs of having to charter additional vessels to assist the rigs/barge. We estimate that the newer higher specifications SEUs typically cost around 40% of a similar jack-up rig.

How SEUs are used. SEU’s services include both operational expenditure (opex) and capital expenditure (capex) related activities. Opex activities include inspection,
repair and maintenance operations, well intervention, accommodation and decommissioning services. Capex activities include offshore construction and construction support operations.

SEUs mostly operate in the US Gulf of Mexico (GoM), where it is estimated to have around 150 SEUs in operation over there. Most of the yards constructing SEUs in operation in the GoM are situated in the US states of Texas and Louisiana. There has been recent trends however that suggest that operators are interested in these lower cost vessels especially in West Africa, the Middle East and South East Asia.

Upcoming new and improved drilling SEU. It recently announced the TDU-400 series, a 163m legs-length mobile SEU service rig. The T Series can operate in water depths of up to 120m and accommodate 220-300 personnel, depending on the configuration of the rig. In addition, it will have drilling and construction capabilities.

In addition to its current lineup. Its current SEU lineup includes the second generation BH 450 series, the world’s first 450-foot legs mobile SEU service rig, which was jointly designed by the group and a US engineering design house. The BH 450 can operate in water depths of over 80m and accommodate 300 personnel. It also has a smaller version, the BH 335, which can operate in water depths of up to 70m and accommodate 160 personnel.

SEU built by Triyards for Ezra. SEU “Lewek Leader”, one of the liftboats built by Triyards and currently operating in Ezra’s fleet. It can carry up to 160 personnel, has a large 1025m2 deck area, two high capacity (181ton) cranes and 97m legs.

Capabilities to build advanced high-spec vessels, with its latest addition to Ezra’s fleet - the ice-class Dynamic Position 3 (DP3), multi-lay, heavy lift construction  vessel “Lewek Constellation” built at its Vietnam Yard. This vessel can operate at water depths exceeding 3,000m.

Ship repair on Hercules. Its newly commissioned 10,000MT floating dock, the Lewek Hercules has added extra capabilities to its ship repair business segment. It recently performed repair and maintenance on an OSV and has already another contract in its pipeline.

Industry Outlook
Oil demand driven by non-OECD countries. Crude oil consumption from non- OECD countries is set to surpass OECD countries by 2015 according to OPEC’s estimates. Exploration and production companies are increasing E&P spending to develop new sources of supply to supply this demand and replenish existing oil fields.

Capex spending going strong. Infield Systems Ltd (Infield) estimates that offshore oilfield infrastructure capital expenditure (capex) will grow by more than 70% for the period 2012-2016 compared to 2007-2011. Whilst some of this growth stems from deepwater regions, the greatest share of expenditure remains in shallow waters with South East Asia and the Middle East being key regions in this respect.

Asia to lead offshore capex spending. Offshore capex estimation from 2012-2018 globally is expected to reach US$706b. Biggest spending by region is Asia and expected to reach US$146b, with around 86% of it mostly on shallow waters (0-499m water depth), with the remainder composed of deep water and ultra deep water. The three other biggest capex spenders will be Europe, Africa and Latin America, with a combined capex spending of US$362b from 2012-2018.

Key Risks
Drop in oil prices. The oil and gas industry is directly dependent on the prices of oil. With current oil prices, there is still incentive for oil and gas exploration companies to continue spending on capex, especially on offshore drilling equipment which is most predominant in Asia. Should oil prices however fall due to oversupply of oil or a drop in demand from shocks to the global economic growth, it will have an adverse effect on oil and gas spending, thus affecting the orders from its clients.

SEUs demand does not grow outside GoM. SEUs are predominantly used in the GoM and unlike in Asia where jack-ups are most commonly used, these kinds of
vessels will take time to become accepted by the upstream oil companies in the egion. SEUs have cost advantages such as being self-propelled, which cuts the costs of having to charter additional vessels to move the rigs and being cheaper to construct than jack-ups. If the upstream companies prefer the tried and tested jackups, then the orders for SEUs might face slow growth in demand thus affecting theorders for the group.

Competition from Singapore and China yards. Although it does not face competition currently from two of Singapore’s biggest and most established yards, Keppel and Sembcorp Marine, if they do however decide to start building the types of vessels that Triyards specializes in, such as SEUs, then this will have the second biggest impact after oil prices decline. Chinese yards which have focused on traditional shipbuilding in the past will also pose a serious challenge as they seek to diversify into the O&G industry, offering discounts of up 30% compared to Singaporean yards while providing better financing options for clients.

Financial Highlights
3Q13 revenues decreased 61% yoy to US$65.8m, and net profit decreased 55% yoy to US$7.5m mainly from lower revenue recognition for construction of Lewek
Constellation, which peaked in 2H12, and partially offset by three SEU projects which started construction in 1H13.

Dip before growth. FY12 revenues increased 223% yoy to 366.8m, and net profit increased 421% yoy to US$44.1m. A key driver for the massive increase was the completion of the group’s second shipyard in Vietnam, Triyards SOFEL, which boosted production capacity. Another major factor contributing to the increase was the construction of Lewek Constellation. Going forward, we expect FY13 revenues and net profit to drop 24% and 34% yoy, respectively, due to the drop in net order book from the completion of the vessel Lewek Constellation (which contributed significantly to its FY12 and 1HFY13 revenues). However, we expect growth to average 11% for both top and bottom line going forward into FY14-15.

Healthy balance sheet. The group generated negative free cash flow of US$43m mainly from increased working capital requirements, attributable to construction of Lewek Constellation and some SEU projects. In addition, it had capex of US$4.7m to improve its shipyards in Vietnam and conversion of a load out barge into a floating dock. As a result, it reversed its net cash position of US$3.9m in the previous quarter to a net gearing of 29% at end May 2013. Still, this is an improvement on a yoy basis, where its net gearing was 56.2% as at end FY08/12.

Order book concerns. Although its current net order book stands at US$264m as at 31 May 2013, an 18.5% decrease from US$324m in the previous quarter, we believe that with the introduction of the next generation of SEUs and improvements in its current line ups of existing SEUs, as well as additional revenue coming from ship repair owing to its newly completed floating dock, the group should be able to improve its order book from FY14 onwards.

Valuation and Recommendation
We are optimistic on growth potential. Although there are concerns on the lack of visibility on its current order book, we believe that with the introduction of the next generation of SEUs and additional revenue coming from ship repairs owing to its newly completed floating dock, the group should be able to pick up on growth from FY14 onwards. We expect FY13 revenues and net profit to drop 24% and 34% yoy, respectively, due to the drop in net order book from the completion of the vessel Lewek Constellation (which contributed significantly to its FY12 and 1HFY13 revenues). However, we expect growth to average 11% for both top and bottom line going forward into FY14-15.

We initiate Triyards with an Overweight recommendation and a $0.97 fair value. This is based on 7x FY14 PER (discounted 30% to its industry peers in the marine and offshore industry to account for its smaller size). Despite its smaller size compared to heavy weights Keppel and Sembcorp, we believe its specialization and experience in building SEUs will put the company in a good position to take advantage when these types of vessels become more accepted in regions such as Asia and Africa.



Source/Extract/Excerpts/来源/转贴/摘录: NRA-Research,
Publish date:18/07/13

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