The Malaysian offshore support vessel (OSV) market is poised for continued upturn further into 2024 and beyond, propelled by increased activities from Petronas and a prevailing vessel supply shortage. ICON is on track to achieve significant earnings growth from FY24 to FY25, driven by rate renewals for its fleet. We are initiating coverage on ICON with an OUTPERFORM rating and a TP of RM0.80.

OSV market poised to boom in 2024. Petronas forecasts a higher demand for OSVs in 2024, aligning with increased drilling activities. The OSV market is strengthening, evidenced by a daily charter rate (DCR) rise of 8%-10% YoY in 2023. With no new vessels built by local players since 2014 due to financing constraints, we anticipate the supply crunch to continue, supporting a sustained DCR uptrend from 2024 onwards. This is further supported by strong demand from the Middle East and West Africa markets.

Explosive growth in earnings anchored by DCR revisions. ICON's earnings are set to rise, as 11 of its OSVs, currently under the ILCT contract expiring in 1HFY24, are likely to be renewed at higher spot market rates. Concurrently, cost of sales is expected to increase by 2% YoY, reflecting easing supply chain inflation. This positions ICON to fully capitalize on the DCR uptrend post-contract renewal. We assume an average DCR of RM49,005/52,600 for FY24/FY25.

OSV fleet is well positioned for market. The company has a balanced fleet of AHTS and PSVs with an average age of 14 years, well-positioned to benefit from the tightening OSV market. It is reactivating two laid-up AHTS vessels in response to market demand, with one expected to return to service in the next two months and the other later on, enhancing earnings from 2HFY24 onwards. Given the challenges in acquiring new vessels, stemming from financing constraints and a scarcity of global yard capacity, ICON's position is notably advantageous. The company operates a fleet of OSVs that still has considerably extended operational life spans.

The balance sheet is already cleaned up. We assess that ICON has no immediate or medium-term requirement for fundraising. Following a share consolidation and rights issue with free warrants in 2020, the group raised RM247m and restructured its debt on improved terms. The acquisition of a rig from PERISAI at a favourable valuation in late 2020, was subsequently sold in October 2022 for nearly double the purchase price. These measures significantly reduced the group's net gearing to 0.4x in FY22 from 8.7x in FY19.

Initiate coverage with an OUTPERFORM call. We are initiating coverage on ICON with a target price of RM0.80, applying a FY25F PER of 10x on fully diluted EPS. This valuation aligns with the median forward PER of 10.2x observed amongst Malaysian and Singaporean- listed OSV companies during the 2010-2014 upcycle. Given ICON's earnings growth potential, our target PER is positioned conservatively. Absent significant recessionary pressures, we posit that the local OSV market is in the nascent stages of recovery, with ICON poised for a prolonged earnings upswing.

COMPANY OVERVIEW

ICON, a prominent offshore support vessel provider, offers an extensive array of logistical support services to the upstream oil and gas industry. The company currently operates 19 active vessels available for charter in the waters off Malaysia and Brunei. ICON is engaged in four main categories of OSV vessels: anchor handling tug & supply vessels (AHTS), platform supply vessels (PSV), accommodation work vessels, and straight supply vessels (SSV). Each category of vessel plays a crucial role in supporting various aspects of upstream oil field development.

Key management of the company:

1. Dato' Sri Hadian Hashim (Managing Director) who has close to 40 years of experience in the oil and gas (“O&G”) industry, with stints at Sarawak Shell Bhd., Itochu Pipe and Tube Asia Corporation Sdn. Bhd., Integrated Petroleum Services Sdn. Bhd. and Sona Petroleum Sdn. Bhd.

2. Lee Yu Jin (Chief Financial Officer) who started his career as a trainee accountant with Price Waterhouse in London from October 1988 to January 1992 and obtained his Chartered Accountant qualification in 1991. Subsequently, he served as a manager in the Internal Audit Department (European Treasury) of Citibank N.A. based in London from February 1992 to February 1994. In March 2023, he joined ICON as CFO Designate before his formal appointment as the CFO in April 2023.

3. Captain Arjan Singh A/L Angrej Singh (Head of Operations) who is a qualified Master Mariner and has more than 28 years of marine experience and previously was the Head of Fleet (Offshore Support Vessel) for Bumi Armada Navigation Sdn Bhd, an offshore support service provider based in Malaysia with vessels operating globally. In July 2023, he joined ICON as the Head of Operations.

INVESTMENT MERITS

We like ICON for:

1. Anticipation of an upswing in the Malaysian OSV market, driven by a scarcity of new vessels both globally and locally. DCRs are expected to continue rising throughout 2024 and 2025, benefiting established players with operational vessels.

2. Substantial earnings growth in FY25 as the group renegotiates DCR for its 11 vessels currently linked to the Integrated Logistics Control Tower (ILCT) contract, with rates at a lower level since 2018. The contract, set to conclude by 1HCY24, presents an opportunity for the 11 vessels to secure higher market rates upon renewal.

3. Its fleet, consisting of reasonably aged vessels (12-16 years), is ready for deployment to meet the growing demand for upstream OSV services. This positions the company for a substantial uptick in OSV earnings should there be an upcycle in upstream spending in the coming years.

4. The group has achieved a cleaner balance sheet through years of debt reduction via cost rationalization and limited capex spending on new vessels. This financial flexibility enhances the group's agility in the market and reduces reliance on debt financing for new vessels.

Source: Kenanga Research - 13 Mar 2024