As one of the major shipbuilding and repair players in Sarawak, we believe that SYGROUP is well-positioned to capitalise on a potential boom in new orders for offshore support vessel (OSV) newbuilds, driven by anticipated strong demand. While its shipping division is expected to remain stable YoY, the shipbuilding and repair division is projected to experience explosive growth in FY24 and FY25. We value SYGROUP at RM1.17 and recommend an ADD. Its valuation is attractive at 6.5x FY25F PER, at a discount compared to the 8.4x PER of the KL Energy Index and below its 5-year mean of 8.5x as well.

The shipping division will remain stable due to the resilient local demand. SYGROUP’s shipping division, contributing 67% of revenue/profit, operates a fleet of 199 vessels with a gross tonnage of approximately 326,000 mt. While daily charter rates (DCR) have softened YoY in FY24 compared to FY23 due to the normalisation of rates, we anticipate that the shipping division will remain largely stable in FY25, supported by its domestic operations and market stability, which provide consistent lifting volumes. Additionally, the group will focus on operational cost management to sustain its operating margins at 15%.

The shipbuilding division will enter into a potential upcycle driven by the OSV market. In our view, SYGROUP’s shipbuilding division is in a highly favourable position within the local shipbuilding market, poised to capitalise on the surge in demand for offshore support vessels (OSVs), driven by high sustaining daily charter rates. Early signs of recovery in the division were evident, with a 180% YoY surge in revenue, largely underpinned by a significant increase in demand for ship repair and refurbishment, due to the growing demand for second-hand OSVs as the local market is experiencing a supply shortage. While the total demand and supply data is unavailable, we have seen DCRs improving since 2023 for KEYFIELD (OP; TP: RM3.18) and ICON (NOT RATED) This has also resulted in a substantial improvement in EBIT margins, rising from 1% in FY23 to 15% in FY24.

Possess capability to build new build OSVs. We believe that the group’s shipbuilding division is only at the early stages of an earnings boom, as the majority of its current revenue is derived from ship repairs and refurbishment. With three shipbuilding yards located in Kuala Baram, Miri, and Bintulu, the group possesses the potential capacity to construct up to 2-6 vessels per annum. Given the estimated cost of RM143.7m for a new accommodation work boat (based on the recent KEYFIELD (OP; TP: RM3.18) deal for a new DP2 AWB), this could bring the group’s shipbuilding revenue potential to RM200m-RM600m after assuming a more conservative RM100m per new build, to be recognised over two years.

Forecasts. We expect the group’s earnings to improve 23% YoY, primarily driven by a 20% anticipated increase in shipbuilding revenue, supported by a RM90m order for shipbuilding, with order book replenishment expected at RM100m. Additionally, we foresee a 25% increase in ship repair revenue, as demand for these services will likely rise due to strong demand for second-hand OSV vessels. Meanwhile, the shipping business is expected to remain stable YoY, as we do not foresee a significant ramp-up in shipping demand. For FY25, we project a slower earnings growth of 14.3%, underpinned by a further 10% increase in ship repair revenue, while shipbuilding revenue is conservatively expected to increase slightly to RM100m. The group’s balance sheet is also expected to be at a net cash position in FY25 with a net cash balance of RM550m. We note that the group pay dividends in certain years but the trend was volatile

ADD rating with FV of RM1.17. We value SYGROUP at RM1.17, based on a targeted FY25F PER of 10x on a fully diluted basis. We believe that our multiple target is still reasonable as it is 28.5% lower than KLENG Index (Bursa Malaysia Energy Index) 5-year average PER of 14x.

There is no adjustment to our FV based on ESG given a 3-star rating as appraised by us (see Page 3).

Risks to our call include: (i) significantly lower Brent crude prices, (ii) long term capex cut by Petronas, and (iii) unexpected vessel downtime.

Source: Kenanga Research - 26 Sept 2024