• MYR0.57 FV from 10x CY24F P/E. With >30 years of shipbuilding experience, TAS Offshore is riding the wave of tugboat market growth from the rising demand for maritime transportation, vibrant coal mining activities in Indonesia, strong nickel demand, and Chinese investment in Indonesia’s nickel reserves. With >MYR200m contracts for the construction of tugboats to support the mining of coal and nickel in Indonesia, we expect FY23-26F (May) earnings CAGR of 85%. Coupled with its net cash of c.MYR43.5m, the CY24F ex-cash P/E of merely 2.2x makes it compelling.

• Robust orderbook-fuelled capacity. TOB is now focused on building tugboats, of which the market is expected to grow at a 2023-2030 CAGR of 11%, according to Reliable Research Reports. Recently, the group registered a 10-year record high of shipbuilding contracts of >MYR200m to construct tugboats for its Indonesia and Singapore customers (sales derived in SGD). With the strong orderbook, the group has increased its operating workers by 50% YoY to reach >400 (including its outsourced contractors). Currently, its shipbuilding yards in Sibu are running at full capacity and will be kept busy until FY25. As revenue is only recognised upon the delivery/completion of tugboats, we expect revenue to increase meaningfully when it delivers more ships in the not-too-distant future.

• Reaping the fruits from the active Indonesia coal mining industry. Indonesia estimates the country’s coal production to reach new heights and higher exports in 2023, largely due to the expected high demand from India and China – the country’s major coal export partners. The domestic coal consumption in Indonesia is expected to grow consistently until 2029 with new coal plants in the pipeline. The bright outlook for the coal mining industry in Indonesia is expected to spur demand for more tugboats to support the inter-island transportation of bulk material.

• EV-led demand for Indonesia’s nickel boom. In addition to coal plants needed for refined nickel production, tugboats are also highly sought-after in Indonesia to transport nickel bulk materials. Global nickel demand is rising fast thanks to the metal's use as a cathode input for EV batteries. International Nickel Study Group (INSG) expects demand of nickel to grow by 8% this year and another 9% in 2024 with accelerating EV demand. Having the world’s largest nickel reserves, Indonesia is the largest miner and refiner of nickel in the world, thanks to the billions of USD worth of Chinese investments poured into refining operations after the Indonesian Government banned the export of unprocessed minerals in 2014.

• Earnings forecasts and valuation. We forecast a 3-year earnings CAGR of 85% and ascribe a 10x P/E on its CY24F earnings to derive a FV of MYR0.57. Key risks: FX fluctuations, risk of order cancellation or delay and shortage of suppliers or raw materials.

Source: RHB Securities Research - 21 Dec 2023