Potential long-term contracts for Kreuz

We made some interesting discoveries while taking Kreuz’s management on a non-deal roadshow last week. Clients got a glimpse of how tough diving jobs are. The new diving support vessel (DSV) may take deepwater jobs earlier than we expect, while the problem with Swiber’s receivables is improving. As Kreuz has fallen along with the market decline, this presents an opportunity to buy a strong company at a discount.

Not for the claustrophobic. A team of up to 12 divers works 6-hour shifts in a saturation diving module with living space of 21m3 in volume, at depths of up to 250m. They spend four weeks in this tiny space before being relieved, and it may take days to “decompress” to the surface. These extreme technical challenges allow Kreuz to command high margins and improve on these margins via efficient execution.

DSVs should go deepwater. Management seems keen to send the DSVs into deepwater immediately upon delivery. We look forward to this due to the:
i) higher revenue and margin than shallow-water work;
ii) Kreuz is moving up to become a main contractor;
iii) breaking away from Swiber and reducing its dependence and expected receivables-days.

Speaking of receivables…We note a marked improvement here. In 1Q- 2QFY12, Kreuz posted revenue of USD110m while receivables grew by USD55m but in 1Q-2QFY13, revenue stood at USD126m while receivables grew only by USD10m. In other words, its receivables-days peaked at 300 days in FY12 and have been on a downtrend.

Potential long-term contracts. While nothing is confirmed, there is potential for long-term (>5 years) inspection-repair-maintenance jobs in Brunei, where Kreuz dominates with a >80% market share in subsea installation. This could potentially provide a steady income stream.

Unjustifiably low valuations. The shares have fallen in tandem with the overall market and is now trading at 6.3x FY13F EPS and 4.3x EV/EBITDA. Such valuations clearly fail to price in the group’s current operations and the potential of profits trebling in FY16F, attributing zero value to its growth potential. Reiterate strong BUY, with SGD1.14 TP.