Company Note New Listing 27 August 2008 Wednesday, 27 August 2008 For Internal Circulation Only KLCI : 1,070.50 Sector : OIL & GAS Bloomberg : VAST MK Fair Value RM0.95(+26.7%) Analyst : Kaladher Govindan E- : kaladher@ta.com.my : 20721277 ext 1622 Vastalux Energy Berhad A Rising Oil & Gas Player SHARE INFO Stock Code NA Listing Second Board Enlarged Share Cap (m) 206.24 Market Cap (RMm) @ RM0.75 154.68 Par Value (RM) RM0.25 Public Issue (m) 57.2 Offer for Sale (m) 33 Issue Price (RM) RM0.75 Estimated Free Float (%) 40% Closing Date 28/08/08 Tentative Listing Date 12/09/08 Major Shareholders (%) Mohamad Nor Abd Rashid-32.8% Nor Sabri Hamzah-22.6% RATIO & ANALYSIS FY08 FY09 NTA/Share (Post IPO) (RM) 0.43 0.53 P/NTA (x) @RM0.75 1.74 1.42 ROE 18.3% 23.3% ROA 6.1% 9.0% Net Gearing (x) 0.3 0.5 UTILISATION OF PROCEEDS (RM'm) (%) Capital Expenditure 13.0 24.8% Retirement of Borrowings 21.5 41.1% Working Capital 15.3 29.2% Estimated Listing Expenses 2.6 4.9% 52.4 IPO Details Shares (mn) Offer for Sale 33.0 Identified Investors 41.0 Director & Employees 4.24 Malaysian public 12.0 Total 90.30 Vastalux is mainly involved in the upstream oil and gas business primarily providing hook-up and commissioning (H&C), and top side major maintenance (TMM) services for oil majors. During its humble beginning in 1998, the company was merely a supplier of equipment and consumable, and was providing some minor fabrication works. The big break came in 2002 when it was licensed by Petronas to provide TMM services and awarded the Phase 3 of the Angsi Development Project a year later. Today, its services have expanded to include minor fabrication, marine vessel services, offshore underwater services and onshore construction of oil and gas plants. In the current sombre market sentiment, we believe Vastalux's share price should rise to short-term target of RM0.95 to be at par with CY09 market PER of 7.6x but it should have more upside potential based on a 20% discount to our CY09 target sector PER of 12x which rightfully value the shares at RM1.18. The steep discount is to account for its small market capitalization and the Second Board status. Even then Vastalux shares are definitely worthy of investment and we would like to prescribe that investors should subscribe the shares based on the following key considerations, 1. The IPO price is attractively priced at CY09 PER of 6.1x vs. the sector average of 7.6x as earnings are forecast to grow at FY07-FY09 EPS CAGR of 54.2% on strong outstanding orderbook of RM540mn and potential 30% success rate for its current tender book of RM775mn. EARNINGS SUMMARY (RMm) 2005 2006 2007 2008 2009 Revenue 77.3 143.2 143.2 169.6 203.5 EBITDA 7.2 18.5 24.3 28.0 33.6 PBT 5.3 12.5 15.6 23.0 30.5 Taxation -1.8-3.8-4.8-6.7-4.9 PAT 3.5 8.7 10.7 16.3 25.6 MI 0.0 0.0 0.0-0.1-0.2 Net profit 3.5 8.7 10.7 16.2 25.4 EPS (sen) 1.71 4.23 5.19 7.87 12.34 PER 43.7 17.7 14.4 9.5 6.1 GDPS (sen) 0.0 0.0 0.0 2.5 2.5 Dividend Yield - - - 3.3% 3.3% EBITDA Margin 9.3% 12.9% 16.9% 16.5% 16.5% PBT Margin 6.9% 8.8% 10.9% 13.5% 15.0% Net Margin 4.6% 6.1% 7.5% 9.6% 12.5% Tax rate -33.5% -30.5% -31.1% -29.1% -16.0% Sales growth 85.2% 0.0% 18.4% 20.0% EBITDA Growth 157.0% 30.9% 15.3% 20.1% PBT Growth 136.4% 24.1% 47.6% 32.9% NP Growth 146.9% 22.6% 51.7% 56.7% Vastalux Energy Berhad [ 1 ] New Listing
2. The committed IPO profit forecast of RM16.2mn cannot capture earnings enhancement resulting from the MacGREGOR contract that will start flowing from 2009 onwards. The job, which involves manufacturing of high margin hatch cover for bulk carriers, will be done on a 51:49 JV basis in Vietnam with a local player. This project alone has the potential to contribute additional RM4.4mn to FY10 net profit after excluding minority interest. 3. Its has more room for business expansion as the net gearing of 0.34x post IPO gives much flexibility to increase borrowings to fund new acquisitions or assets. The planned purchase of a 160 to 180 men workboat by end-2008 has the potential to generate RM30mn and RM7.5mn in sales and net profit per year based on time charter rate of US$25,000 day and net margin of 25%. 4. Its geographical expansion plan sounds convincing as the company has penetrated into Indonesia and Vietnam in 2008 with readily available contract. The planned extension of its H&C and TMM businesses into Middle East, Philippines, North Africa, India and Myanmar will be value enhancing. Its ability to secure a major fabrication license to start major fabrication works will be another milestone as it has planned to acquire 40 acres of land for the purpose. The catch is whether Petronas will break the unwritten rule of not more than 7 major fabrication licenses in Malaysia. A Brief Introduction As highlighted earlier Vastalux's started as a supplier of equipment and consumable for the oil and gas in 1998 until it obtained the offshore H&C license from Petronas in 2002. The award of job for the Angsi Development Project followed in 2003 and it obtained another offshore and onshore H&C contract from Petronas for three years in 2004. This prompted the establishment of an entity to handle the onshore and offshore fabrication works for the group in 2004. Since then it has established three fabrication yards in Kemaman, Labuan and Bintulu, which are strategic locations to cover the entire oil and gas spectrum in Malaysia. In 2005, it branched out to offshore TMM of platforms, floating production storage and offloading (FPSO) vessel, and floating storage offloading (FSO) vessel, and onshore gas terminal maintenance in Peninsular Malaysia when Petronas Carigali awarded a five year contract. As part of the Group's expansion plan, it acquired an 84 men accommodation workboat in 2006 to complement its H&C and TMM activities. Subsequently, it acquired a 75% interest Merak Utama Sdn Bhd to undertake underwater structural inspection services. Due to its diversified range of services, Petronas Methanol (Labuan) Sdn Bhd awarded the Group RM34mn procurement, construction and commissioning contract for Labuan Gas Terminal and pipeline project for Gas Receiving Terminal 1 and 2 in Labuan. As the Group derived all its revenue from Malaysia (East Malaysia 53.7% and Peninsula Malaysia 46.3% in FY07) management believed that it was timely to venture abroad. The geographical diversification paid off with maiden contracts secured in Indonesia and Vietnam. Its Indonesian subsidiary secured its first job in 2008 for the installation of gas pipeline of EPC Greater Jakarta Distribution Main Line under IFB- 2 project. The second contract was for the procurement services, especially involving steel products and pipes. The Vietnam contract was from MacGREGOR Oy and Alpha Co Ltd for the fabrication of steel products, specifically hatch cover for Bulk Carriers. Vastalux is pursuing a 51:49 JV with Alpha Co Ltd for the purpose, which will also be entrusted to undertake all onshore and offshore oil and gas supporting services that it performs currently in Vietnam. Vastalux Energy Berhad [ 2 ] New Listing
Its current Group structure and the business activities of respective subsidiaries are shown in the following chart. VASTALUX ENERGY BERHAD OIL & GAS SERVICE DIVISION VASTALUX SDN BHD ASSET BASED DIVISION Vastalux E&C Sdn Bhd Topside Major Maintenance Vastalux Offshore Services Sdn Bhd Hook-Up & Commissioning Vastalux Onshore Sdn Bhd Onshore Construction of Oil & Gas Plants Vastalux Marice Sdn Bhd Charter of Marine vessel ~ MV Vasta Jati is parked under VSB Vastalux Capital Sdn Bhd SPV for Islamic Fund PT Vastalux Energy Indonesian Business Venture Merak Utama Sdn Bhd Vastalux Fabricators Sdn Bhd Provision of Yard Space and Minor Fabrication Underwater Structural Inspection Services V-Factor Sdn Bhd Future holding of Vessel Operation Licences Vastalux Energy Berhad [ 3 ] New Listing
BUSINESS OVERVIEW The business activities of the Group can be summarised in the following chart, BUSINES ACTIVITIES OF VEB Offshore & Onshore Hook-Up & Commissioning Offshore Topside and Onside Facilities Maintenance Offshore Underwater Services Marine Service Minor Fabrication Onshore Construction Steel Structures Topside Structure Underwater Structural Inspections Charter of Marine Vessel Pipe Systems Oil & Gas Plants Electrical, Mechanical & Instrumentation Pipes & Valves Minor Steel Structures Top-of-Jacket Electrical & Instrumentation Offshore and Onshore Hook-Up and Commissioning Services Offshore and onshore H&C is the core competency of the Group. Thus, it is not surprising to see this division contributing 34.1% of the group's sales in 2007 (Please see table on segmental breakdown for sales and gross profit mix of all its divisions). The H&C services mainly entail interconnection and interfacing of various process and control systems, including structures, piping and equipment, commissioning, inspection and testing. Offshore Topside and Onshore Facilities Maintenance Services This division was the main revenue earner in 2007 at 40.5%. But YTD contribution for the first three months of 2008 has tapered off compared to same period last year with greater activities at its fabrication yard which coincide with greater revenue contribution from the Labuan Gas Terminal Work. The job requires mechanical maintenance, repair and modification work on platforms, topside structural maintenance, electrical maintenance, minor facilities upgrade, procurement of materials, assembly and pre-fabrication, installation, blasting and painting and etc. Vastalux Energy Berhad [ 4 ] New Listing
As at July 15,2008 the Group has completed approximately 313 work orders involving offshore topside maintenance services for 32 offshore platforms located off the coast of Terengganu, two FPSO facilities, two FSO facilities and onshore facilities maintenance for three gas terminal. Minor Fabrication This division complements its H&C and TMM activities and has the in-house capability to undertake minor fabrications of steel structures, piping system, skids and modules. It has three fabrication yards in located in Terengganu, Labuan and Sarawak. Offshore Underwater Services It is done by a subsidiary company and involves underwater inspection of subsea structures for cracks. It uses a detection method to inspect the presence of water for underwater tubular steel structures or hollow cross steel crossbeam members as generally sub-sea structures used in offshore platforms are made from sealed hollow pipes. It made up approximately 0.1% of Group sales in FY07. Vastalux Energy Berhad [ 5 ] New Listing
Onshore Construction of Oil and Gas Plant It involves the onshore construction of gas receiving terminal and accounted for 17.5% of the Group's revenue in FY07. Charter of Marine Vessel Business This business started only in 2QFY07 with the commissioning of its 84 men workboat. Revenue contribution to FY07 was small at 1.1%. Vastalux Energy Berhad [ 6 ] New Listing
PROJECTS HIGHLIGHT PROJECT VALUE STATUS (RMmn) Petronas Carigali Sdn Bhd Hook-Up & Commissioning umbrella contract (Apr 2007 to 2010) 200 Ongoing Topside Major Maintenance for Peninsular Malaysia Operations (PMO) (March 2005 to 2010) 429 Ongoing Hook-Up & Commissioning umbrella contract (November 2004 to 2007) 180 Ongoing Hook-Up & Commissioning for Angsi Phase 3 (June 2003 to March 2006) 46 Completed Petronas Methanol (Labuan) Sdn Bhd Procurement, Construction & Commissioning for Labuan Gas Terminal and Pipeline Project (June 2007 to June 2008) 34.2 Ongoing Pipeline and Structure Fabrication for PM (L)SB July 2008 to June 2010) 12.3 Ongoing Carigali-HESS Operating Company Minor Fabrication for Cakerawala Facilities (August 2005 to August 2008 19.3 Ongoing Murphy Sarawak Oil Company LTD Minor Engineering & Maintenance Services for Murphy Shallow Water Production Operation (October 2007 to September 2010) 61 Ongoing Provision of Minor Fabrication Works for West Patricia (September 2004 to November 2007) 13.4 Completed Malaysia Refining Company Sdn Bhd Civil Works Package 3 for the Melaka Refinery PSR-2 Revamp Project March to December 2008) 10.5 Ongoing Vastalux Energy Berhad [ 7 ] New Listing
Segmental Breakdown Sales Mix (RM'mn) 2005 2006 2007 1QFY08 1QFY07 Hook-up and Commissioning 29.8 76.0 48.8 15.4 11.8 Topside Major Maintenance 38.8 59.5 58.0 7.6 15.8 Fabrication 8.3 7.2 9.7 6.1 0.8 Labuan Gas Terminal Work 0.0 0.0 25.0 11.0 0.0 Others 0.5 0.5 1.7 0.7 0.4 Total 77.3 143.2 143.2 40.8 28.8 Gross Profit (RM'mn) 2005 2006 2007 1QFY08 1QFY07 Hook-up and Commissioning 3.8 2.6 6.3 2.4 1.3 Topside Major Maintenance 8.1 19.7 14.6 2.0 3.8 Fabrication 0.8 2.2 3.0 0.7 0.1 Labuan Gas Terminal Work 0.0 0.0 5.3 2.9 0.0 Others 0.5 0.3 1.6 0.4-0.1 Total 13.2 24.8 30.9 8.4 5.1 Sales Mix (%) 2005 2006 2007 1QFY08 1QFY07 Hook-up and Commissioning 38.5% 53.1% 34.1% 37.7% 41.1% Topside Major Maintenance 50.2% 41.5% 40.5% 18.7% 54.9% Fabrication 10.7% 5.0% 6.8% 14.9% 2.6% Labuan Gas Terminal Work 0.0% 0.0% 17.5% 27.1% 0.0% Others 0.6% 0.3% 1.2% 1.6% 1.3% Total 100.0% 100.0% 100.0% 100.0% 100.0% Gross Margin (%) 2005 2006 2007 1QFY08 1QFY07 Hook-up and Commissioning 12.9% 3.4% 12.8% 15.5% 10.8% Topside Major Maintenance 20.9% 33.2% 25.2% 26.6% 23.9% Fabrication 10.0% 30.0% 31.4% 11.9% 10.0% Labuan Gas Terminal Work - - 21.0% 26.6% - Others 100.0% 56.5% 98.6% 53.2% -13.8% Total 17.1% 17.3% 21.5% 20.6% 17.6% Customers Revenue Contribution By Customer (%) 2005 2006 2007 1QFY08 Petronas Carigali (Peninsula Operation) 50.2 41.5 40.5 18.7 Petronas Carigali 38.5 53.1 32.6 37.7 Petronas Methanol (Labuan) Sdn Bhd 0 0 17.5 27.1 Murphy 10.7 1.6 2.6 13.4 Others 0.6 3.8 6.8 3.1 Vastalux Energy Berhad [ 8 ] New Listing
It is apparent that the Group depends a lot on Petronas group of companies for its survival. Sales from Petronas alone contributed to almost 90% of its sales in 2005 and the mix was almost unchanged two years later. The fact that this trend has changed slightly in 1QFY08 is consoling. The contribution from minor engineering and maintenance services for Murphy's shallow water operations helped to mitigate the over reliance on Petronas. Nevertheless, this is not an isolated phenomenon as most oil and gas service providers in Malaysia rely heavily on Petronas for their business survival in their early years of inception. This trend will not last once these players graduate and able to compete on a global scale, which is the direction Vastalux is taking now with its ventures into Indonesia and Vietnam and planned penetration into other overseas market as highlighted before. Future Plans Among the key highlights are, Major Fabrication Business It wants to engage on major fabrication activities for the upstream oil and gas industry by 2010. The specific focus is to undertake engineering and fabrication of the offshore production facilities namely topsides and jackets. The catch is whether Petronas will break the unwritten rule of not more than 7 major fabrication licenses in Malaysia as all the seven licenses have been taken up with the last one given to Boustead Heavy Industries Corporation. However, as it has already acquired 40 acres of land for the purpose and confident of achieving it in the next two years, there could be more to this than meets the eye. Purchase of Working Assets The Group plans to acquire another 160 to 180 men workboat by end of 2008 to compliment its current business. This vessel will have floating accommodation and on-deck work area. The workboat has the potential to generate RM30mn and RM7.5mn in sales and net profit per year based on time charter rate of US$25,000 day and a conservative net margin of 25%. It also plans to expand the minor fabrication yard in Kemaman by end of 2008 and has leased a 40,000 square metres of land from the Terengganu state government for the purpose. Plans are also on the drawing board to acquire 40 acres of land and commence construction of a major fabrication yard by 2009. Provision of New Services The Group intends to provide similar range of maintenance services to onshore facilities including Oil & gas plants, petrochemical, fertiliser and methanol plants. Part of the Group's future plan is to leverage from its existing core competencies in offshore maintenance services to provide onshore maintenance services. According to the Ninth Malaysia Plan, RM30.7bn has been allocated for the development of downstream Oil & Gas segments. Regional Geographical Expansion The Group primarily services the local market. The Group plans to expand its geographic coverage to provide a range of offshore platform services including offshore topside maintenance, charter of marine vessels, minor fabrication and offshore hook-up and commissioning to other markets outside Malaysia. The targeted countries are included in the following table. Vastalux Energy Berhad [ 9 ] New Listing
The group's future plans can be summarised in the following chart and table respectively. Future Plans of VEB Group New Business Activity New Market Segment Deepwater Supporting Operations Acquisition of Working Asset Geographical Expansion Major Fabrication Onshore Maintenace Services Offshore Hook-up and Commissioning Services Marine Vessel Philippines Offshore Topside Maintenance Services Acquisition of Land & Construction of Major Fabrication Yard Middle East (Focusing on Qatar, Oman & Saudi Arabia) North Afica (Focusing on Libya) India Myanmar Implemenatation of the Future Plans of VEB Group Year of Commencement End of 2009 2010 2011 2008 New Business Activity ~ Major Fabrication Business New Market Segment ~ Onshore Maintenance service Deepwater Supporting Operations ~ Offshore Hook-up and Commissioning ~ Offshore Topside Maintenance Services Acquisition of Working Asset ~ Marine Vessel ~ Acquire Land and Construction of Fabrication Yard # Additional Minor Fabrication Yard in Kemaman # Acquire Land and Construction of Major Fabrication Yard Geographical Expansion ~ Philippines ~ Middle East (Focusing on Qatar, Oman and Saudi Arabia) ~ North Africa (Focusing on Libya) ~ India ~ Myanmar Risks Since the Group's business is primarily based on contractual agreements on specific projects, the Group is faced with risks as it is dependent on long-term contracts. The Group's order book is up to year 2010 that it currently has five long-term contracts with Petronas and PSC operators, including PCSB, Carigali Hess, Murphy and Petronas Methanol (Labuan). The Group is dependent on its major customers as seen in FY07 where PCSB and PCSB (Peninsular Malaysia) accounted for 32.6% and 40.5% of the Group's total revenue. Even though this is a common feature among operators that provide services in the upstream O&G industry in Malaysia, the Group's business is dependent on PCSB. Therefore, any glitch would impact the Group's earnings negatively. Vastalux Energy Berhad [ 10 ] New Listing
Additionally, the fluctuating price of hydrocarbons is also a threat to the group. Activities tend to decline during periods of sustained low hydrocarbon prices, which also includes lower demand and lead to temporary shutdown in production from reserves that are no longer commercially viable. Valuation Due to current bearish market sentiment, Vastalux's Second Board status and small market capitalization, we are attaching an immediate target of RM0.95 after applying current upstream oil and gas CY09 PER of 7.6x on its 2009 EPS. Nevertheless, the stock holds long-term potential based on contracts-in-hand, new market penetrations and future plans. Even if we accord a 20% discount to our target CY09 PER of 12x due to the above last two reason, the resultant target price of RM1.18 looks appealing for long-term investors. The dividend yield of 3.3%, although not very enticing, can be soothing factor for long-term investors. Subscribe. DISCLAIMER The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD Yaw Chun Soon, Executive Director - Operations TA Securities Holdings Berhad (14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Menara TA One, 22 Jalan P Ramlee, 50250 Kuala Lumpur. Malaysia Tel : 603-2072 1277. Fax : 603-2032 5048 Vastalux Energy Berhad [ 11 ] New Listing