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Kreuz Holdings – Good Results, Strong chart, Low valuations
Corporate Digest | 02 April 2013
By: Ernest Lim
Articles (134) Profile

Before July 2008, Kreuz Holdings was a division of the Swiber Group. Subsequently, it was listed on Singapore Exchange on 29 July 2010 and transferred its listing to the Main Board on 8 October 2012. Kreuz is a subsea provider whose services include subsea construction and installation services that support new offshore installation and construction projects, as well as, inspection, repair and maintenance (“IRM”) of existing offshore production and pipeline facilities.

Some Interesting Points

1. FY13F likely to beat FY12 record revenue and earnings since listing
Order book as at end February 2013 is around US$205 million. With reference to Figure 1, the bulk is likely to be recognised in FY13F. (FY12 revenue was around US$193 million.) 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 February 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, 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, it estimates that subsea expenditure for 2011-2015 will triple to US$7 billion, up from US$2.25 billion over 2006-2010. This is corroborated by the positive comments from the various large subsea players such as Technip, Saipem, Aker Solutions and 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$205 million, Kreuz’s order tenderbook is currently around US$500 million (according to DBS Research) of which 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$113.7 million 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, assuming 60 to 70 percent utilisation on the new build vessel, it can rake in minimum incremental revenue of US$50 million and net profit of up to US$15 million per year. (Kreuz FY12 revenue and earnings were US$193 million and US$40 million respectively.)

6. Interesting sell queues
Although the 30-day average volume amounts to 2.8 million shares a day, there seems to be heavy sell queues (most of the time) at $0.485 to $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. However, professionals are unlikely to place so many shares on each level as 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 six months currently constituted about 50 percent of its receivables which is quite a significant amount. However, UOB Kay Hian cited that this was already an improvement from six months ago, when such receivables constituted about 60 percent of its receivables. According to company, they are of the view that the receivables remained collectible.

2. Customer concentration risk (reliance on Swiber)
Another concern that some investors cited is the customer concentration risk. With reference to Figure 3, Kreuz has come a long way to diversify its customer base. In FY12, despite Swiber contributing more in revenue dollar terms, the revenue from third parties continued to rise from 60 percent in FY11 to 61.7 percent 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 and 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 March 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 $0.011 in 3Q12 but for prudence, analysts who covered Kreuz are not projecting any dividends for this year.

Table 1: Kreuz vis-à-vis its peers, Source: Bloomberg (as at 28 March 13)

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.

Ernest Lim is a CFA, CA and has worked at GIC Special Investment. He has a solid feel of the markets and financial world and is now a remisier.

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