Triyards Holdings (ETL SP) - 1QFY17 Look Beyond Margins in Order-Challenged Market
- Net profit for 1QFY17 was US$2.1m, below expectations, attributed to lower-than-expected gross margin and higher interest expense.
- Net gearing is expected to rise until delivery of the chemical tankers. Low margins will persist owing to the need for successful delivery of first-time orders.
- Order outlook remains challenging. We cut our net profit forecasts by 26-36% and target price to S$0.46, benchmarked to 0.46x 2017F P/B.
- Maintain BUY on valuation grounds.
Net profit of US$2.1m, below expectations.
- Triyards reported 1QFY17 net profit of US$2.1m (-66% yoy), coming in at 13% of our full-year estimate. This was below our and consensus’ expectations.
- The earnings weakness was attributed to gross margin collapsing to 11.5% (4QFY16: 12.5%, 3QFY16: 16.9%) and a 47% yoy increase in interest expense.
Gross margin declined 7.2ppt on challenging market conditions.
- Despite revenue growing to US$91.2m (+17% yoy) owing to more vessels under construction than in 4QFY16, Triyards reported a US$10.5m gross profit, a 28% yoy decline.
- The decline was attributed to lower gross margins, owing to its growing proportion of non-liftboat orders, which were secured at lower margins due to the “competitive market environment”. This was further exacerbated by the use of sub-contract workers for certain projects, which further ate into margins.
- Altogether, this resulted in the sharp drop in margins.
Working capital requirements saw net gearing rise above 66%.
- Net gearing rose from 60% in 4QFY16 to 66% in 1QFY17 due to further drawdown in working capital to fund various projects.
- Recall that this spike in net gearing was due to Triyards undertaking a chemical tanker project, which has a back-loaded payment structure. Until the project’s delivery in 3QFY17 (May 17), net gearing is expected to rise further.
Rise in net gearing of minimal concern.
- The rise in net gearing is due mostly to drawdown in working capital loans, which are backed against milestone payments due from Triyards’ clients. These clients are mostly companies with strong balance sheets or are government-affiliated. Thus, we are not overly concerned about the rise in net gearing given that payment will likely be made upon delivery, which will reduce Triyard’s debt.
A net-cash company at the core group level.
- Triyards said the group’s core debt was approximately US$12m, assuming all orders were executed and fully paid.
- Taking into account current cash balance of US$28.5m (US$13.2m cash pledged included), Triyards is essentially a net cash company at core group level.
Low margins to persist for next few quarters.
- The frustratingly low gross margin will persist for the next two quarters at least. This is partly due to orders secured at lower margins, and partly due to the commitment of additional resources to ensure successful delivery of its first-time non-liftboat orders (thus necessitating the use of sub-contract workers).
- A successful delivery bestows confidence to the client, paving the way for future orders. In an environment where orders are scarce, any advantage to secure future work should take precedence over profitability.
- At the bottom line, it is to be noted that cost controls remains strict and that the projects are not going into losses.
Challenging environment may see lower-than-expected contract wins.
- While oil prices have risen, the uptick in activity is not likely to absorb the oversupply of offshore assets. Demand for new offshore assets remains low and yards continue to face an order drought.
- Competition is fierce for what little work is left among yards, and there is a risk that Triyards may secure an even lower amount of projects than in last year. Should this happen, earnings will slide in FY18.
No change to contract wins assumption for now.
- The order drought is likely to persist for an extended period. However, higher oil prices may lend a more favourable contract outlook for non-offshore assets in 2H17.
- We keep our contract wins assumption of US$250m unchanged for now, opting to review our assumption after Triyard’s 1HFY17 results when the market impact of OPEC’s cut further filters into the system.
Reducing net profit forecasts by 26-36% for FY17-19.
- We have further cut our effective gross margin assumption to 13.5% for FY17 (from 15%), and 15% for FY18-19 (from 17%). This reduces our net profit forecasts to US$10m (-36%) for FY17, US$9m (- 30%) for FY18 and US$11m (-26%) for FY19.
Maintain BUY but lower target price to S$0.46 (from S$0.50), based on 0.46x FY17F P/B.
- Our benchmark P/B represents a 30% discount from 0.65x, the P/B derived for OSV stocks assuming Brent crude price of US$55/bbl. This compares to the small-cap shipyard sector mean P/B of 0.39x.
- An undervaluation for Triyards exists, given that it trades at the same or lower valuation of peers that have high gearing and negative ROE when it exhibits the opposite (see table). This is likely attributed to the overhang from parent Ezra, which we think will diminish as the O&G outlook gradually improves.
- With a 46% price upside, we maintain BUY on valuation grounds.
SHARE PRICE CATALYST
- Contract wins.
- Positive developments for parent Ezra.