KEYFIELD is poised to cash in on the offshore support vessel (OSV) boom in Malaysia, having embarked on expansion during the downcycle of the OSV market in 2014 that enabled it to assemble a young fleet with top-of-the-range specifications at reasonable capital outlays. We initiate coverage on KEYFIELD with an OUTPERFORM rating and a TP of RM1.90.

Expanded at the right time, right place. KEYFIELD strategically expanded in 2014 amidst a prolonged downturn in the local OSV market, leveraging third-party charter contracts to refine the skills necessary for the OSV industry. This period of fleet expansion has enabled the group to enter the OSV vessel ownership market at a lower cost. By focusing on the Accommodation Work Barge (AWB) subsegment within the OSV space, KEYFIELD has positioned itself well to capitalize on the up-cycle for the AWB market.

AWB market is booming. We anticipate that the demand for AWBs in 2024 will surpass the last peak observed in 2019. This is due to an increase in topside maintenance and Hook-Up & Commissioning (HUC) activities in Malaysia, as clients accelerate their upstream maintenance efforts. On the supply side, a persistent deficit is evident, with the count of Malaysian-owned AWBs remaining at 42, and no announcements of new build vessels to date. Therefore, the escalating demand is expected to continue driving up AWB daily charter rates (DCR).

IPO proceeds will free up its balance sheet. Following its IPO, KEYFIELD is expected to transition from a 0.7x net gearing to a slight net cash position in FY24. This change comes as the IPO proceeds will primarily be used to settle cumulative redeemable non-convertible preference shares (CRNCPS) owed to Lavin Group, a major shareholder, with the remaining funds allocated towards acquiring two vessels, Blooming Wisdom and Helms 1. Such financial restructuring is projected to lower the company's finance costs by 64% in FY24, thereby enhancing its bottom line. Additionally, the improvement in financial health provides KEYFIELD with the flexibility to consider acquiring one or two more vessels in the near to medium term.

Possesses an advantage in its fleet. Thanks to its strategic fleet expansion, KEYFIELD's OSV fleet’s age profile averaged eight years old, newer than the industry's ten-year average. Newer vessels not only offer improved fuel efficiency but also incur lower maintenance costs. Furthermore, most of KEYFIELD's AWBs are equipped with DP2 systems, enabling operation in harsher offshore environments. This capability makes KEYFIELD's OSVs more attractive to potential clients, potentially allowing the company's vessels to command DCRs that are 10-30% higher than industry average in the current market.

Initiate coverage with an OUTPERFORM call. We are initiating coverage on KEYFIELD with a TP of RM1.90, applying a PER of 11x on its fully diluted FY25F EPS of 17.3 sen (assuming full exercise of ESOS). This valuation aligns with the median forward PER of 10.2x observed amongst Malaysian and Singaporean-listed OSV companies during the 2010-2014 upcycle. We attribute the premium of KEYFIELD’s to the peak cycle industry average due to its higher expected net margins and ROE for its OSV business due to its superior fleet profile. We initiate our coverage of the stock with an OUTPEFORM call.

COMPANY OVERVIEW

Keyfield is principally involved in the chartering of own and third-party vessels, providing offshore accommodation, catering, housekeeping, laundry, and medical support services. Presently, Keyfield owns 11 Malaysian-flagged vessels with capacities ranging from 50 to 500 personnel. They are also Petronas Carigali Sdn Bhd (PCSB) and other Petroleum Arrangement Contractors (PACs) Umbrella Contract panel contractor for drilling and project activities.

Key management of the company:

1. Darren Kee (CEO) has been responsible for the overall management of our Group since its establishment, overseeing and driving our strategic and financial planning, business development and day-to-day business operations, including sourcing and negotiating the commercial terms of chartering contracts, liaising with third-party vessel owners, and financing of our Group’s operations. He was appointed to the board on 30 November 2020.He incorporated Keyfield Offshores Limited (KOL) and in October 2013, he also incorporated Wisdom Creator Limited (WCL), which was then involved in shipbuilding activities for offshore support service vessels (primarily AWBs). KOL ceased its operations in December 2014 and was deregistered from the Companies Registry (Hong Kong) in June 2021 while WCL ceased its shipbuilding activities in December 2020.

2. Mohd Erwan (Chief Operations Officer) has at least 16 years of experience in project management, shipbuilding and repair of vessels including naval ships, luxury yachts as well as commercial vessels.He began his career in March 2008 as a Technical Executive with Boustead Langkawi Shipyard Sdn Bhd, a company principally involved in the construction, repair and maintenance of boats and yachts where he was attached to the engineering department.In July 2018, he assumed his present position as the Group COO.

3. Eugene Kang Hong Ngee (Chief Financial Officer) obtained his Association of Chartered Certified Accountants (ACCA) Qualification in September 1995, and was admitted as an Associate in October 1998, and subsequently became a Fellow of the ACCA in October 2003. In May 2018, he joined S&P International Holding Limited, a company listed on the Main Board of the Stock Exchange of Hong Kong Limited which is principally involved in food and beverage manufacturing as its Chief Financial Officer, where he was responsible for the corporate and financial matters of the group. In September 2020, he left S&P International Holding Limited and assumed his present position in KEYFIELD as Group CFO since October 2020.

INVESTMENT MERITS

We like KEYFIELD for the followings:-

1.Setting up the company to capitalise on the AWB upcycle. The strategic decision to establish the company during the downcycle since 2014 has proven to be a masterful move by management, allowing the group to enter the OSV market at lower costs. This timely entry enabled the acquisition of OSV vessels at favourable prices, positioning the company to benefit from the anticipated upswing in the OSV market significantly, particularly in the accommodation workboat and work barge space.

2. Substantial interest cost savings in FY24 post-debt repayment after IPO. The IPO proceeds will be used to pay off RM61.5m worth of cumulative redeemable non-convertible preference shares (CRNCPS), with an additional offering of 90m KEYFIELD shares at the IPO price to settle the remaining CRNCPS. This move will alleviate the group's obligation to pay annual dividends to CRNCPS holders from 2024 onwards.

3. One of the youngest AWB fleets in the OSV industry with favourable specifications (average 8–year profile), puts the group in a more favourable negotiation position with the clients for charters and potentially securing higher daily charter rates (DCR). That aside, five of its work boats are DP2, which will command a DCR premium compared to non-DP2 vessels.

4.The third-party vessel charter business was a stepping stone for eventual vessel ownership since its inception, enabling the transition to vessel ownership and providing the group with decent margins. Typically, KEYFIELD begins by chartering vessels owned by third parties and then rechartering them to end-clients. This strategy not only lays the groundwork for future acquisitions by the group but also establishes a foundation for expanding its operational capabilities and fleet.

Source: Kenanga Research - 19 Apr 2024