We came back from a recent meeting with TAS’ Management feeling positive on its prospects, driven by its strong orderbook of MYR330m as at end-Feb 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 & 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  orderbook, 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. We reiterate our BUY call, with a FV of MYR1.57, pegged to an unchanged target P/E of 12x. We deem this valuation fair, as it implies a low 3-year average PEG of 0.13x.  
 
Still in good hands. TAS’ future prospects remain intact, shored up by its MYR330m-strong orderbook as at end-Feb 2014.  The company is in talks with potential clients for more contracts. Its foray into Indonesia’s oil and gas (O&G) sector is showing positive results, and the company is now negotiating contracts to supply a few more vessels in the next two years.  
 
BTS model bearing fruit. TAS started adopting the BTS model last year for some mid-size vessels in order to reap higher margins. Typically, it requires 12-24 months to build a vessel, depending on size, but this model allows TAS to start negotiating with its clients when a vessel is 50-60% 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 2H this year. We expect earnings to potentially surge in FY15 upon delivery of these BTS vessels.  
 
Leveraging  on  lower  tax  system  in  Labuan. As we 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, TA Ventures (L) Ltd. Going forward, we may see lower effective taxes at around 15% when its Labuan subsidiary starts recognising greater profits in FY15. 
 
Maintain  BUY  and  MYR1.57  FV.  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 FV of MYR1.57, based on a FY14F EPS of 13.1 sen. This is pegged to a 12x P/E – which is still a 25% discount to its 4-year average P/E of 16x. We deem this valuation fair given that the stock’s 12x P/E implies a low 3-year average PEG ratio of 0.13x.

Source: RHB