TAS  Offshore (TAS)  has secured a MYR13.2m contract from its new Indonesian customer to build a utility tug. Its  total  orderbook stood at MYR340m  as at  14 March 2014,  with  earnings potentially set to surge  from  its  five  build-to-stock (BTS)  vessels.  Its  BTS  business model is now bearing fruit, as some clients are willing to pay a higher price for a shorter waiting period. The company’s fundamentals remain intact, buoyed  by its strong orderbook,  potential  higher margins  from its  BTS  model, positive growth prospects  in  the  O&G sector,  as well as  its ability to capitalise on Labuan’s low tax system. We leave our FY14F and FY15F numbers unchanged as we have factored in some orderbook replenishment in our forecasts. We reiterate our BUY call, with a FV of MYR1.57, pegged to an unchanged target P/E of 12x.

Secures  MYR13.2m contract.  TAS  has won a contract, awarded by its new Indonesian customer, worth  MYR13.2m for the  construction and sale of a utility tug.  The vessel, expected to be delivered in April 2015, will be built in its  Sibu shipyard.  According to an article by The Star that was published on 16 March,  executive chairman and managing  director Datuk Lau Nai Hoh  mentioned that  the company’s Sibu  shipyard is currently fully utilised, with about 15 new vessels being constructed. Its total orderbook stood at some RM340m as at 14 March 2014.

Potential surge in earnings due to BTS  model. The new contract entails a build-for-sale job, which means that TAS would start building vessels upon receiving a contract. We are still hopeful that the company may  win some build-to-sale (BTS) contracts in the near future.  TAS  adopted the  BTS model last year for some mid-size  vessels,  in order to reap higher margins  while shortening the wait period for clients. Currently, the company  is building  five  vessels for oil & gas (O&G)  offshore activities  and has outsourced the construction of  larger vessels to its  partners in China. We expect earnings to potentially surge in FY15 upon the delivery of these BTS vessels.

Expecting positive 9MFY14 results. We are expecting a good set of 9MFY14 results - which will be released by end-April – as its orderbook is in a healthy state and the price of oil is hovering above USD90/barrel, which  continue to  indicate positive conditions for the oil & gas sector. In addition,  the  company  is  able  to  capitalise  on  the  low  tax  system  in  Labuan  via  its  wholly-owned  subsidiary.  Going  forward,  we  should  be seeing a lower effective tax rate, i.e. ranging 10-15%, when its Labuan subsidiary starts recording profit in FY15.

Maintain  BUY and  MYR1.57  FV.  We  are upbeat on the new contract announcement,  as  TAS’ total orderbook  of  MYR340m  implies that the profitability  of  its  future  quarters  is  secured.  We  also  maintain  our  FY14F  and  FY15F  forecasts  as  we  have  factored  in  some  orderbook replenishment in the next two years. Given the positive backdrop of  the oil & gas sector,  the company’s  strong earnings growth and its  ability to capitalise on Labuan’s low tax system, we believe that TAS would continue to do well.   In addition, should the  USD continue to strengthen against the MYR, it is also favourable to the company.   We maintain our  BUY call on the stock, with an unchanged FV of MYR1.57,  pegged to a FY14F 12x P/E – which is a 25% discount to its 4-year average P/E of 16x.

Source: RHB