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Results blew away expectations. Interim income came in at $16.9m (+83.5%) on the back of a 104.5% jump in sales to $84.6m. As of 1H05, the group has already surpassed its FY04 full year income of $16.3m. To celebrate this record year, KSE has proposed total dividends of 3.1cts (1.6ct interim; 1.5.ct special) and a 1 for 5 bonus issue.
All-rounded performance. The robust results reflected robust oil and gas equipment distribution sales, maiden contributions from newly acquired companies (ie. MarineHub) and commencement of 4 rig-related projects secured in Nov03-Mar05. The group also reaped disposal gains of $7.6m from the disposal of shares in Ezra. Net cash position ballooned to $18.2m (vs $5.4m), bolstering its war chest to finance new rig contracts.
Firing on all cylinders in 2H05. Management guided for stronger 2H05 as it would start recognizing contribution from all 7 rig contracts versus 4 contracts in 1H05. We estimate the rig contract segment to contribute $6m in 2H05. Regardless of the direction in oil price, management is confident of securing more contracts to upgrade vintage rigs as yard capacities are full; the average lead time to build new rigs goes up to 4 years. More rig contracts would in turn fuel demand for the parts and equipment distribution business.
Rolling over to FY06. Using the same PER valuation multiple of 15x, our new target price is $3.30 based on revised FY06 earnings; our original forecasts had been conservative. Upgrade to Buy on the strong rig order momentum.
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