▊ Even though the 1Q earnings outperformance represented an emphatic start, ASL is not resting on its laurels. It is shifting its business model to speculative building which offers convenience and flexibility to customers. This makes sense in an improving OSV market. At 29% of our FY14 forecast, 1QFY6/14 core earnings were 16% above our expectations and in line with consensus. We lift our FY14-16 core EPS by 6-14% on higher margins. We maintain our Outperform rating with a higher target price as we roll it forward to 0.9x CY14 P/BV, its 5-year mean. Catalysts could come from shipbuilding sales, faster turnaround of Vosta and big repair jobs.
All segments outperformed
ASL’s 1Q core earnings of US$9.9m (-21% yoy) beat expectations as all its segments outperformed margin expectations. Shipbuilding was the best performer due to higher recognition of more units of OSVs and one dredger. The outperformance more than offset a 1.8x increase in admin costs (due to Vosta and S$1.4m amortisation charge for intangible assets) as well as higher tax (higher deferred tax for Batam’s operations and Vosta’s pretax loss of S$2.6m which cannot be offset).
Not resting on its laurels
To compete more effectively against Chinese yards, ASL is shifting its business model to build-to-stock from build-to-order. It will start building four generic-designed AHTS (6,000-8,000 bhp) and one maintenance work vessel in the beginning of CY14 (total cost: S$85m). We concur that the refocus makes sense as build-to-stock offers convenience and flexibility to customers, especially in an improving OSV market. With the shift in focus, we slash our FY14 build-to-order expectations to S$50m from S$300m. We have not factored in any vessel sales from the build-to-stock programme, which would likely occur in FY15 and provide upside to our numbers.
Order book offers visibility
Even with low order intake expectations, ASL’s order book of S$268m (owing to record orders it received in FY12) secures our FY14-15 earnings forecasts.