Fair value S$0.85
1Q12 net loss narrows
KS Energy (KSE) reported a 5.6% fall in revenue to S$120.2m and a net loss of S$315k in 1Q12 vs. a net loss of S$8.3m in 1Q11. Revenue was within our expectations, accounting for 22.3% of our full year estimates. We note, however that there was a one-off gain of S$10.6m due to a reversal of fair value loss on an option relating to KS Endeavor; excluding that we estimate core net loss of S$10.5m in the quarter, close to our full year net loss forecast of S$11.5m.
Costs mostly stable
Revenue from the distribution business, which accounted for 71.1% of total revenue, saw a 3.5% drop in revenue in the last quarter, while the drilling division rose
40.2% YoY as more assets were chartered. Costs remained mostly stable except for a significant increase in direct depreciation charges due to capital assets commencing work on their charters as well as accelerated depreciation on a rig.
Convertible bonds with redemption option
The group’s convertible bonds (principal amount ~S$100m) have an option by bondholders who may redeem the bonds in Mar 2013. Management has been “weighing the various options available to meet this funding requirement” should the redemption option be exercised. KSE has proven adept at raising funds from investors and partners such as Itochu of Japan, Dubai-based Dutco and private equity fund Actis. Hence we would not be surprised if there are news of further tie-ups in the near future.
Restructuring ongoing
Business restructuring in the distribution segment is still ongoing, which will be a gradual process. Besides integration of different IT systems and operational procedures, there also has to be the amalgamation of employees from different companies and hence different working cultures. In line with recent weakness in market sentiment which has impacted valuations of the broader industry, we lower our peg from 1.5x to 1.4x FY12F NTA, and as such our fair value estimate slips to S$0.85 (prev. S$0.91). Maintain HOLD.
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