TAS has strong order book and viable build-to-stock business model

by **Cals** Tue 11 Mar 2014, 11:30

Business & Markets 2014

Written by RHB Research

Tuesday, 11 March 2014 09:52

TAS Offshore Bhd
(March 10, RM1.20 )
Maintain buy with target price of RM1.57: We came back from a recent meeting with the management of TAS feeling positive on its prospects, driven by its strong order book of RM330 million as at end-February 2014, excluding the potential earnings contribution from its five build-to-stock (BTS) vessels.

Its BTS business model is now bearing fruit, as some clients may be willing to pay a higher price for a shorter waiting period. This means profit margins may be improved further.

TAS, whose foray into the supply of vessels to Indonesia’s oil and gas (O&G) industry last year is showing positive results, is currently negotiating for the supply of more vessels in the next two years.

Its fundamentals remain unchanged, buoyed by its strong order book, potential higher margins from its BTS model, positive growth prospects in the O&G sector, as well as its ability to capitalise on Labuan’s low-tax system.

TAS started adopting the BTS model last year for some mid-size vessels in order to reap higher margins. Typically, it requires 12 to 24 months to build a vessel, depending on the size, but this model allows TAS to start negotiating with its clients when a vessel is 50% to 60% complete, which in turn fetches higher margins since clients’ waiting period is shortened.

Currently, TAS is building five vessels for O&G offshore activities, and some of its clients want speedy delivery by the second half (2H) of this year. We expect earnings to potentially surge in financial year 2015 ending May 31 (FY15) upon delivery of these BTS vessels.

As we had stated in our initiation report, the company plans to capitalise on the lower tax system in Labuan by channelling vessels of bigger sizes to its wholly-owned subsidiary in Labuan.

Going forward, we may see lower effective taxes at around 15% when its Labuan subsidiary starts recognising greater profits in FY15.

We continue to be positive on the prospects of the O&G sector, and still like TAS’ strong fundamentals, underpinned by its strong earnings growth, potential higher margins arising from its BTS model and its ability to capitalise on Labuan’s low tax system.

We maintain our “buy” call on the stock, with an unchanged target price of RM1.57, based on a FY14 forecast earning per share of 13.1 sen. This is pegged to a 12 times price-earnings ratio (PER) which is still a 25% discount to its four-year average PER of 16 times.

We deem this valuation fair given that the stock’s 12 times PER implies a low three-year average price-earnings to growth ratio of 0.13 times. — RHB Research, March 10

[You must be registered and logged in to see this image.]

This article first appeared in The Edge Financial Daily, on March 11, 2014.