Highlights

Robust local E&P activities drive OSV demand… Despite softer global E&P spending, the ETP driven RM300bn capex to enhance exploration, EOR and marginal fields required a massive level of drilling activity which will drives demand for OSV. The recent award of 2 RSC contracts to Uzma and Vestigo also indicates the potential of more RSC contracts to roll out in the next 6 months.

Riding on asset localisation theme… According to Infield System, only 56% of AHT/AHTS and 66% of PSV/SSVs currently operating in Malaysia are local flagged. We expect similar asset localization trend that is happening in the Jack up drilling rig segment being replicated in high end OSV in Malaysia.

Relative young fleet with higher utilisation… Icon has a relative young AHT/AHTS fleet of average 5 years vs. SouthEast Asia’s average of 7 years and global’s average of 10 years. It also enjoys higher than average utilization rate for its AHT/AHTS and PSV/SSV vessels of 86% and 94% vs peers average of 65-82% and 74-75% respectively.

Growth story… Net profit is expected to grow at strong pace with three years CAGR of 32% mainly driven by fleet expansion from 32 vessels in FY13 to 39 vessels in FY16, better margin capture as own vessels delivery has replaced forerunner vessel coupled with higher utilisation rate.

Strong balance sheet provides room for expansion… There is still more room for additional vessel acquisition besides the current 6+1 vessels under construction as its net gearing remain manageable of 0.6x in FY14 and expect to further drop to 0.3x in FY16.

Low PEG ratio with PER falling to <11x in FY16… The company is trading at 20x FY14 P/E and 14x FY15 P/E, premium as compared to its peers in OSV sector which averaged 13x FY14 P/E and 11x FY15 P/E respectively. However, after taking into account the strong earnings growth prospect, the company is trading at 0.5x FY14 PEG which is significant below its peers. We expect P/E to fall to <11x in FY16 and with our assumption of constant charter rate and no additional vessel acquisitions apart from the current 6+1 vessels under construction.

Catalysts

• Announcement to acquire more new OSVs given its strong balance sheet.
• Replacing low specification with high end specification vessels which will result in cost saving and higher utilisation rate.

Risks

Global recession hitting O&G price; Technology advancement; relaxation of Petronas’ domestic Policy.

Valuation

We arrive fair value of RM2.08 based on 16x FY15 P/E or premium to peers’ average target of 14-15x given its strong earnings growth prospect (three-year CAGR of 32%).

Source: Hong Leong Investment Bank Research - 4 Jun 2014