Icon Offshore Bhd (ICON), which is en-route for a listing on 25 June, is one of the largest pure-play Offshore Support Vessels (OSV) providers in Southeast Asia. Currently, it owns 32 vessels that are mainly for shallow-water operations, but six (6) firm incoming vessels (2 accommodation workboat vessels (AWBs); 1 platform supply vessel (PSV); 1 fast crew boat (FCB); 2 10k bhp anchor handling tug and supply vessels (AHTSs)) will change its fleet profile. By FY16, its fleet will be 39-vessel strong. We like ICON for its: (i) young and versatile fleet that straddles various phases of the oil and gas value chain, (ii) ample space for further leverage that will not cap future fleet expansion programs, and (iii) experienced management team. It also stands to benefit in a vibrant oil and gas segment given: (i) Petronas’ sustainable capex for domestic development, (ii) Petronas localisation policy that favours Malaysian-flagged vessels, and (iii) continual tight OSV supply. We forecast FY14 and 15 net profits of RM120.6m and RM159.5m on the back of asset additions and better utilis ation rates for existing vessels. We value ICON at CY15 PER of 15.5x on par with our valuation for Perdana Petroleum (PERDANA; OP; TP: RM2.47) which leads to a fair value of RM2.10/share. As our fair value represents 13.3% upside from the indicative IPO price of RM1.85 we advocate investors to SUBSCRIBE to the stock.

Young and versatile fleet enhances ICON’s value proposition. ICON owns and operates a total of 32 vessels with average fleet age of approximately 5 years. It will receive six newbuild vessels (2 AWB; 1 PSV; 1 FCB; 2AHTS) in 2014-2015 which are equipped with technologically advanced equipment and machineries which are ready to cater to the various phases of oil and gas value chain. Having a versatile fleet enables ICON to capture a myriad of opportunities, making ICON an attractive OSV proposition.

More room to leverage up. Post the IPO, ICON’s net gearing is expected to fall to 0.7x (from 2.8x in FY13). We understand that management is comfortable with a maximum net gearing ratio of 1.2x which implies that ICON has ample room to borrow for its ongoing capex commitments.

Longer-term contracts provide earning visibility. Currently, ICON has an order book of RM700.2m (including optional extensions). Firm contracts currently make up 71.8% (RM502.4m) of the order book, whilst 89.1% of the order book consists of long-term contracts (more than 12 months). The long-term contracts provide the company earning visibility until year 2018.

2-year net profit CAGR of 33.4%. We forecast a FY14 and FY15 net profits of RM120.6m and RM159.5m, respectively, on the back: (i) higher average utilization rates for some existing vessels and (ii) increased asset base, which includes the six newbuild vessels.

The risks to the optimistic outlook include: (i) a downturn in the oil and gas sector that will delay contract flows, (ii) lowerthan-expected capacity utilisation, (iii) lower-than-expected charter rates, and (iii) inability to secure new contracts.

1. Brief Introduction

ICON is one of the largest pure-play OSV providers in Southeast Asia in terms of fleet size. It owns and operates one of the youngest fleet of OSVs in Southeast Asia (average 5 years) that is equipped with technologically advanced equipment and machineries to provide a wide range of logistical support services throughout the entire offshore oil and gas life cycle. The fleet currently stands at 32 vessels; with 6 additional vessels due for delivery in 2014 and 2015. ICON is still in negotiation for an additional vessel for tentative delivery in 1Q16. By FY16, ICON’s vessel count should breach 39 vessels barring any future disposals along the way.

2. Investment Merit

Domestic demand for OSVs still strong. Sustainable capital expenditure from Petronas over the next five years (c.USD17.6b is planned for shallow water projects according to Infield Systems) and its asset localisation policies (the replacement of foreign flagged vessels by Malaysian-flagged vessels) will be demand drivers for domestic OSV operators. From a supply standpoint, the disposal of aging vessels (globally, 28% of AHTSs and 22% of PSVs are above 25 years but all are small sizes according to Pareto Securities) in the market will place ICON newer vessels’ on better footing moving ahead.

Young and versatile fleet in sweet spot for opportunities along the oil and gas value chain. As at LPD per the prospectus, ICON’s current fleet has an average age of approximately 5 years, which is lower than the Malaysian and Southeast Asia industry average of 5.3 and 10 years, respectively. This bodes well for the company as we understand that there is an age limit (around 15 years) which oil and gas majors have set for the assets that they charter, as a younger fleet offers lower maintenance costs. ICON’s fleet also straddles various phases of the oil and gas value chain (existing vessels are the lower spec AHTSs, UVs and SSVs; whilst new deliveries (2 AWB; 1 PSV; 1 FCB; 2 10k bhp AHTSs) are equipped with greater engine capacity and higher specifications eady to cater to the brownfield and more challenging deep water segments) making ICON an attractive OSV proposition.

Stable baseline earnings from existing order book. As at the LDP, the company has an order book of RM700.2m (including optional extensions). Firm contracts currently make up 71.8% (RM502.4m) of the order book, whilst 89.1% of the order book consists of long-term contracts (more than 12 months). The long-term contract provides stable baseline cash flows for ICON, leaving management more time to focus on capturing short-term contracts or new markets that may offer better DCRs compared to long-term contracts.

More room to leverage up. Post the IPO, ICON’s net gearing is expected to fall to 0.7x (from 2.8x in FY13). We understand that management is comfortable with a maximum net gearing ratio of 1.2x net gearing ratio which implies that ICON has ample room to borrow for their ongoing capex commitments. The OSV business is capex intensive (as with the other oil and gas segments) as such a continuous fleet renewal and replacement plan is imperative to stay current. The flexibility to leverage implies that ICON will not be constrained should it want to opt for higher value vessels in the near-future.

Experienced leadership team and highly skilled workforces. ICON is helmed by a seasoned management team. The group is headed by Dr. Jamal bin Yusof @ Gordon Duclos who was the founder and Managing Director of OMNI (now known as ICON Fleet) and has over 17 years of experience in the OSV industry. He first ventured into oil and gas sector back in 1997, where he was responsible for the electrical engineering and OSV services. In 2006, founded OMNI Power together with his business partner and acquired their first vessel. Currently, he also the President of the Malaysia OSV Owners’ Association. Second in line is Capt. Hassan Bin Ali who is Chief Corporate Officer and Deputy Chief Executive Officer of ICON and is responsible for day-today management. He began his career as Deck Officer with MISC Bhd in 1975 and left in 1985 as Chief Officer. He was the Chief Executive Officer of TKS (now known as ICON Ship) in 2005 and 2006 and has over 38 years of experience in the marine transportation industry.

3. Use of Proceeds

Based on the IPO price, gross proceeds of RM410.2m will be raised from the Public Issue. The group has allocated: (i) 40.5% (c.RM166.2m) for fleet expansion, (ii) 30.2% to pare down bank borrowings (which stand at RM867.9m currently), (iii) 13.3% for repayment of advances from Hallmark, (iv) 10.4% for working capital, and (iv) 5.6% for listing expenses. Total construction costs of four vessels [1 PSV (expected delivery 1Q2016), 1 AWB (expected delivery 3Q2015), 2 AHTS (expected delivery 3Q2015)] are estimated at RM284.0m. 40.5% (c.RM166.2m) of the proceeds is intended to be utilised for the progress payments. The balance of RM177.8m will be financed via internally generated funds and bank borrowings.

4. Industry Outlook

Domestic oil and gas sector outlook still positive on Petronas' goals. Based on Economic Transformation Program (ETP), about RM65b is expected to be spent on various initiatives for the offshore Oil & Gas industry, which includes: (i) RM46b on rejuvenating existing oil fields through enhanced oil recovery, (ii) RM5bn on developing small fields through innovative solutions, and (iii) RM15b on North Malaysian basin project. Moreover, to improve oil production via investments in both domestic greenfield and brownfield operations, Petronas aims to spend RM300b up till 2015. These headline figures are proof that Petronas’ capex spend for the local development is here to stay.

Anchor Handling Tug Supply (AHTS) market supported by growth in the Malaysian offshore drilling market. An AHTS is typically deployed to tow offshore rigs from one location to another and to deploy anchors in order for the rigs to maintain a specific position during the drilling process. According to Infield Systems, utilisation rates for vessels within Malaysia will be in excess of 85% per annum between 2015 and 2019 (this is a growth from 2013’s average utilization rate which was estimated to exceed 80%). A peak of 89.9% is expected during 2018 as the market tightens and total of 115 vessels are expected to be required in the domestic market.

Demand for PSV/SSV vessels is expected to recover after the temporary oversupply situation. PSVs are capable in deepwater conditions and used to deliver large quantities of cargo to offshore drilling and production sites. Meanwhile, SSVs primarily operate in shallow water and are designed to provide transportation services to offshore platform and facilities. Based on Infield Systems, due to temporary oversupply situation, utilisation for PSV/SSV vessels is expected to fall to 74% in 2014 (compared to 78% during 2013). However, this rate is expected to recover to 80%-86% in 2015-2018 due to the growth in the installed base of platforms. Infield Systems expects there to be more than 42 vessels required per annum between 2013 and 2019. 

Static supply of AWB and increase in demand will drive the utilisation rate. AWBs are used to support offshore construction and Inspection, Marine & Repair (IMR) activity. According to Infield Systems, the AWB fleet within Malaysia is relatively limited with smaller capacities if compared to the fleet in Indonesia or Singapore, reaffirmed by our channel-checks with existing listed OSV players. The static supply of AWB and gradual increase in the demand of AWB to support brownfield and maintenance activities in Malaysia waters will drive demand and utilisation rates.

5. Financial Analysis and Earnings Estimates

Successful fleet expansion plans promoted substantial net profit growth in the past. ICON’s core net profit rose substantially from RM44.5m in FY11 to RM89.6m in FY13 at CAGR of 41.9% on the back of CAGR of 21.6% hike in revenue from RM226.5m in FY11 to RM334.9m in FY13 mainly due to: (i) higher revenue contribution from forerunner vessels and (ii) increase in the number of our vessels from 23 in FY11 to 32 as at the LPD.

2-year net profit CAGR of 33.4%. Moving forward, we expect: (i) the FY14E and FY15E total revenues to grow by +15.2% and +27.3% to RM385.7m and RM490.8m, respectively, and (ii) FY14-15 net profits to grow to RM120.6m and RM159.5m, respectively. Drivers for the net profit growths are: (i) increased number of vessels (total 6 additional new vessels will be delivered in 2014 and 2015), and (ii) better margins after debts are pared down post-IPO (we expect net gearing levels to improve to 0.5x FY15 barring no further fleet increases).

6. Valuation/Recommendation

Subscribe to IPO with TP of RM2.10. We value ICON at CY15 PER of 15.5x which is on par with our valuation for Perdana Petroleum (PERDANA; OP; TP: RM2.47). We think that the ascribed PER is justifiable as: (i) ICON’s upcoming vessels are in a sweet spot (high demand for incoming vessels) and (ii) its premium margins (c.EBITDA above 50%) Our target PER implies that the fair value for ICON is RM2.10/share, representing 13.3% upside from the indicative IPO price of RM1.85.

7. Risks

Downturn in the oil & gas sector. Demand for ICON’s OSV services are highly dependent on the level of activities and the corresponding capital spending by oil and gas companies, which are significantly affected by: (i) crude oil price movements and (ii) cyclicality in the offshore drilling and oilfield services industries, which are strongly correlated to general economic, social and political conditions of the global economy. In the event of prolonged reduction in oil and natural gas prices, these may depress the levels of activity in offshore oil and gas exploration, the development and production activity and ultimately demand for OSV services that will affect ICON.

Lower-than-expected capacity utilisation and a charter rate downturn. The offshore marine vessel industry is very sensitive to capacity utilisation and daily charter rate (DCR) outlook. If a situation like 2009-2011 when DCRs fell to an average of USD1.40-1.60/bhp repeat, there will be significant repercussions to the profitability of all the OSV players including ICON. However, in the near-term, we believe its long-term contracts will mitigate such risks.

Inability to secure new contracts. In event of a delay in the new contracts roll-out or inability of ICON to meet customers’ prequalification requirements, the company may lose the opportunity to bid for future contracts and consequently fail to increase or maintain the volume of new contracts. Failure to obtain new contacts or renew existing contracts would materially and adversely affect the company earnings and future growth plans.

8. Appendix

Company history and key milestones

Icon Offshore Berhad was incorporated in Malaysia under the Act on 30 March 2012 as a private limited company under the name Kota Bayu Ekuiti Sdn. Bhd. The company was converted into a public company on 12 July 2012 and assumed the present name on 25 October 2012. The company is a result of a strategic consolidation of two pure-play OSV companies within Ekuinas’ portfolio, namely ICON Ship (formerly Tanjung Kapal Services Sdn. Bhd.) and the ICON Fleet Group (formerly Omni Petromaritime Sdn. Bhd. group of companies).

Source: Kenanga