Kreuz 2Q13 earnings in line, on track for another growth year

Highlights
Another impressive quarter. 2Q13 net profit of US$14.6m (+ 10% y-o-y) was in line with expectations, on the back of 25% revenue growth to US$76.4m. Results would have been better if not for a one-off loss on a small contract, which dragged gross margins down by 3ppts sequentially to 29.2%.

Our View
Expect further orders in 2H13. Current orderbook stands at US$145m, and will underpin revenues for the next 6-12 months. We estimate YTD contract wins of around US$65m, including variation orders and unannounced contract wins, and we believe new contracts in 2H13 should help Kreuz meet our full-year new order win estimate of US$150m. Parent Swiber recently announced new offshore construction contracts worth US$435m, and Kreuz should be in line to secure the subsea components of these contracts.

Wait for new asset to fuel growth from FY15 onwards. While Kreuz has built up an enviable track record of project execution and earnings delivery, growth is constrained to an extent by the availability of suitable vessels to perform turnkey subsea contracts. Currently, it is chartering in at least 2 assets from the third party market to deliver its projects. This is expected to change once its newbuild state-of-the art multi-purpose support vessel arrives in 2015. Kreuz also has the option to build another similar unit and we believe Kreuz will be able to bid competitively for global SURF (subsea, umbilicals, risers and flowlines) projects of higher value when these vessels are delivered. Funding is not an issue, with balance sheet in a healthy position.

Recommendation
Maintain BUY. The SURF market continues to be one of the brightest spots in the offshore O&G services space, backed by an increase in the development of oil and gas fields in deeper waters and development of marginal fields which need tie-backs to existing infrastructure. With its asset light strategy, strong execution track record and ROE of close to 25%, Kreuz remains one of our top picks in the sector. TP raised to S$0.95, as we roll over valuations to blended FY13/14 earnings and raise our PE multiple to 9x.