Kreuz – good results; strong chart; low valuations

el15

*Dear all, below is my introductory writeup on Kreuz. As i have problems attaching some of the charts on my blog, feel free to email me at crclk@yahoo.com.sg

 

Description of Kreuz
Before July 2008, Kreuz was a division of the Swiber Group. Subsequently, it was listed on SGX on 29 Jul 2010 and transferred its listing to the Main Board of the SGX-ST on 8 Oct 12. Kreuz is a sub sea provider whose services include subsea construction and installation services which support new offshore installation and construction projects, as well as, inspection, repair and maintenance (“IRM”) of existing offshore production and pipeline facilities. Do refer to Kreuz’s website http://www.kreuzsubsea.com/services.html for more details.
Some interesting points

1. FY13F likely to beat FY12 record revenue and earnings since listing
Order book as at end Feb 2013 is around US$205m (See Figure 1) of which the bulk is likely to be recognised in FY13F. (FY12 revenue was around US$193m.) Thus, coupled with the variation orders or unannounced contracts, Kreuz is likely to turn in a better FY13F than FY12, notwithstanding that FY12 was already a record year in terms of revenue and net profit since listing.
Figure 1: Kreuz’s order book (in US$m) since Feb 2011
Source: Company

2. Variation orders or unannounced contracts are quite material
According to DBS Research, variation orders or unannounced contracts which are not shown in their order books can be quite material. Thus, by looking at Kreuz’s order book alone may underestimate the financial results of the firm.
3. Industry prospects remain bright
With reference to Figure 2 below, it is apparent that the capital expenditure is likely to increase in the various regions and for IRM from now to 2016. According to Infield Systems, an independent energy research and analysis firm, they estimate that subsea expenditure for 2011 – 2015 will triple to US$7b, up from US$2.25b over 2006-2010.   This is corroborated by the positive comments from the various large subsea players such as Technip, Saipem, Aker Solutions etc.
In addition, in Asia, Malaysia, China, India and Indonesia are likely to lead subsea demand over the next five years. This should bode well for Kreuz with its presence in Malaysia, India and Indonesia.
Figure 2: Industry prospects remain sanguine
Source: Douglas Westwood

4. Strong tenderbook of about US$500m
Notwithstanding Kreuz’s strong order book of US$205m, Kreuz’s order tenderbook is currently around US$500m of which (according to DBS Research), there may be new order wins in the near term.

5. FY15F is likely to be another growth year when its new build vessel arrives
Kreuz is building a US$113.65m deepwater subsea construction vessel via a Chinese shipbuilder. This vessel will be equipped with dynamic positioning and would enable Kreuz to compete in deepwater projects with leading subsea contractors such as Subsea 7 and Technip.
According to DBS Vickers, based on 60-70% utilisation on the new build vessel, it can rake in minimum incremental revenue of US$50m and net profit of up to US$15m per year. (Kreuz FY12 revenue and earnings were US$193m and US$40m respectively.)

6. Interesting sell queues
Although the 30 day average volume amounts to 2.8m shares a day, there seems to be heavy sell queues (most of the time) at 0.485-0.505 of around a million each. This begs the question that if the sellers do have that many shares, they are likely to be professionals and are unlikely to place so many shares on each level. This would deter the potential buyers away. Furthermore, although the buy queue for Kreuz looks thin, it seems rather steady and price is roughly around the same level without dropping much intraday.Personally (although I cannot quantify point 6 and it is most likely not 100% accurate), this pattern seems to show smart money accumulating the shares. I have seen it in Guocoleisure, Ezion, Nam Cheong, Sino Grandness, China Animal, Eratat before. They seem to be a prelude of some upwards movement (though it may take some time to materialise.)

Some noteworthy points
1.      Long trade receivables
One of the drawbacks of Kreuz that most investors are wary of is its long trade receivables days. According to UOB Kay Hian Research, receivables spanning more than 6 months currently constituted about 50% of its receivables which is quite a significant amount. However, UOB Kay Hian cited that this was already an improvement from 6 months ago, where such receivables constituted about 60% of its receivables. According to company, they are of the view that the receivables remained collectible.
2.      Customer concentration risk I.e. Reliance on Swiber
Another concern that some investors cited is the customer concentration risk. With reference to Figure 3 below, Kreuz has come a long way to diversify its customer base. In FY12, despite Swiber contributing more in revenue dollar terms, the revenue from 3rd parties continued to rise from 60% in FY11 to 61.7% in FY12.
Figure 3: Revenue split from Swiber and 3rd parties
Source: Company
Nice chart
With reference to Chart 1 below, Kreuz’s chart looks reassuring as it seems to be on an uptrend and is attempting to break out above its resistance of $0.490. Indicators such as RSI, MACD etc seem to be strengthening but are not overbought at current levels. OBV is at an all time high. ADX seems to be stopping its decline and turning upwards amid positively placed +DI. If it breaks $0.490 with volume, a measured technical target price would be around $0.550 with the first significant resistance (after $0.490) to be around $0.515 (all time high price).
Chart 1: Attempting to break $0.490 resistance
Source: CIMB itrade complimentary chart (28 Mar 13)

Valuations low against peers
According to Bloomberg, if we compare Kreuz against its Singapore listed peers (though not exactly direct comparables), it is trading at the lowest FY13F PE (Kreuz: 4.7x FY13F PE vs the average FY13F PE
of 9.7x) with the highest ROE (Kreuz: 29.4% vs the average ROE of 12.6%). In addition, Kreuz has actually given an interim dividend of 1.1 SG cents in 3QFY12 but for prudence, analysts who covered Kreuz are not projecting any dividends for this year.
Table 1: Kreuz vis-à-vis its peers
Short
Name		 Last Px Analyst TP Change in TP 1 Yr high 1 Yr low Adj Mkt Cap
(S$m)		 FY12 PE FY13F PE ROE (%) Fwd P/Bv Fwd Div Yield
Kreuz
Holdings		 0.48 0.55 15.6 0.49 0.25 267.4 5.3 4.7 29.4 1.1 NA
Swiber
Holdings		 0.67 0.82 21.8 0.73 0.51 409.0 6.7 5.7 11.2 0.6 1.7
Ezion
Holdings L		 2.12 2.42 14.0 2.17 0.71 2036.2 17.9 12.7 19.5 2.5 0.1
Ezra Holdings
Lt		 1.16 1.37 18.2 1.36 0.82 1130.5 14.7 15.5 6.3 0.8 0.8
ASL Marine
Hldgs		 0.72 0.87 22.1 0.75 0.55 301.7 8.2 6.9 10.3 0.8 2.9
CH Offshore
Ltd		 0.48 NA NA 0.53 0.36 334.9 7.0 7.5 15.7 0.8 7.1
Average ex Kreuz 10.9 9.7 12.6 1.1 2.5
Source: Bloomberg (as at 28 Mar 13)
ConclusionThis is just an introduction on Kreuz. Readers who are interested to know more about Kreuz can email me at crclk@yahoo.com.sg for the analyst reports & my full writeup complete with charts.

P.S: This is an abridged version which I had sent to my clients on last Wed.

Disclaimer

The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

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