• MYR0.96 FV based on 10x FY25F (May) P/E. With >30 years of shipbuilding experience, TAS Offshore is benefitting from the strong SGD/MYR and capitalising on the booming tugboats market driven by increasing maritime transportation demand and vibrant coal mining activities in Indonesia. We are witnessing strong nickel demand for EV batteries and Chinese investment in Indonesia’s nickel reserves. With contracts >5x FY23 revenue, TOB is poised for a robust FY23-26F earnings CAGR of 117.6%. The FY25F ex-cash P/E of only 3.4x and PEG of 0.18x makes it a compelling investment.

• Robust orderbook-fuelled capacity. Since 2018, TOB has pivoted its focus from constructing offshore support vessels for the oil & gas industry, which is heavily influenced by fluctuating crude oil prices, to prioritising the construction of tugboats, acknowledging its versatility. According to Fortune Business Insights, the global tugboats market is anticipated to grow at a 2023-2030F CAGR of 13.3%. Recently, TOB clinched a 10-year record high shipbuilding orders of >MYR200m for the construction of tugboats for its Indonesia, Singapore and China customers. Currently, the group’s shipbuilding yards in Sibu are running at full capacity, producing 14 tugboats per year and will be kept busy until CY25. We tweak our revenue and earnings higher from the previous report after factoring in higher ASP that has increased by c.8% as a higher horsepower is needed for the tugboats. We also increase the SGD/MYR assumption from 3.25 to 3.5 (as per our latest RHB house forecast).

• Powering Indonesia’s coal and nickel transportation boom. TOB’s tugboat business is poised to benefit significantly from the thriving nickel and coal mining activities in Indonesia. With the Indonesian Government raising its coal production target to 710m tonnes in 2024 and setting a domestic market obligation target at 220m tonnes, the approval of a coal production quota of 922.14m tonnes for 2024 (+c.30%), reflects anticipated high demand from major export partners India and China, as well as the increasing number of nickel smelting plants coming online. Also, Indonesia's status as the largest miner and refiner of nickel, driven by increasing global demand for refined nickel in EV batteries, presents additional opportunities. The International Nickel Study Group forecasts a 9% growth in nickel demand in 2024, with Indonesia nickel production expected to grow at a 4% CAGR between 2022 and 2026. TOB's tugboat business is strategically positioned to capitalise on these favourable market dynamics, providing essential support for coal and nickel transportation in Indonesia's burgeoning mining sector.

• Earnings forecasts and valuation. We forecast a 3-year earnings CAGR of 117.6% and ascribe a 10x P/E on its FY25F earnings to derive its FV of MYR0.96. Key risks: FX fluctuation, risk of order cancellations or delays as well as shortage of suppliers or raw materials.

Source: RHB Research - 25 Apr 2024