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Results beat expectations
Net income came in 12% higher than expected at $33.6m (+106.5%), underpinned by strong distribution sales and higher contribution from long-term rig contracts. Excluding one-off gains, core profits still rose an impressive 127% to a record high of S$19.7m. To reward shareholders, the group has proposed a 1:5 bonus issue on top of S 2.6c final and special cash dividend payout.
Broad-based performance
Total turnover was up 183% to $269.1m. Distribution sales jumped 132% to $160.7m. This segment, which constitutes 60% to total turnover, enjoyed strong organic growth because of increased cross-selling opportunities between the equipment distribution and capital equipment and related services divisions. Notably, KSE saw contributions from 6 rig contracts in FY05 vs 2 in FY04. Sales from capital equipment related projects jumped 316% to $108.4m. Group gross margins dropped to 22% vs 32.0% in FY04 due mainly to a difference in income recognition on a certain rig contract. As KSE usually provides the assets on back to- back leases, it recognizes commission/lease income as a norm. The rig in concern was booked at full contract value in FY05 due to certain technical terms in the contract.
Strong balance sheet
KS Energy closed the year with record net cash balances of $62.4m, up from $5.4m in FY04. With its cash coffers, KSE is now looking to acquiring capital equipment vis-¨¤-vis its current modus operandi of back-to-back leases. Management will be scouting for projects with a payback period of 3 years. KSE expects the strategy to pay off in terms of higher returns as asset prices (& day rates) are expected to remain high given the supply shortages in the industry. The recurrent cash flows from these assets will also help smooth out earnings volatility.
In a sweet spot; maintain Buy
KS Energy will continue to focus its core on upgrading and refurbishing vintage capital equipment. The group has executed well in this segment and will, as detailed above, move to acquiring offshore assets as a new lever of growth. In view of the track record and robust industry outlook for rigs, we have raised our target multiple for the stock to 17x FY06 EPS, giving us a new target price of $3.12. Maintain Buy.
·ñÈÏÉùÃ÷ DISCLAIMER
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