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D M G & P a r t n e r s R e s

DMG & Partners Research OIL & GAS

Edison Chen +65 6232 3892 edison.chen@sg.oskgroup.com Terence Wong, CFA +65 6232 3896 terence.wong@sg.oskgroup.com

Initiating Coverage

April 25, 2012

SINGAPORE EQUITY Investment Research

Private Circulation Only

EQUITY Investment Research Private Circulation Only SBI Offshore B U Y - Price S$0.21 Previous
EQUITY Investment Research Private Circulation Only SBI Offshore B U Y - Price S$0.21 Previous

SBI Offshore

BUY

-

Price

S$0.21

Previous

-

Target

S$0.34

OIL & GAS

Asia’s leading turnkey drilling equipment solution provider with a portfolio of OEM offshore equipment product lines.

Stock Profile/Statistics

Bloomberg Ticker STI Issued Share Capital (m) Market Capitalisation (S$m) 52 week H | L Price (S$) Average Volume (‘000) YTD Returns (%) Net gearing (x) Altman Z-Score ROCE/WACC Beta (x) Book Value/share (S¢)

SBIO SP

2,974.4

 

121.7

25.6

0.225

0.138

23.1

0.0

Net cash

 

3.6

0.5

Na

10.2

Major Shareholders (%)

Tan Woo Thian David Hui Choon Ho Jonathan

 

37.7

36.3

A great leap forward as earnings multiply

SBI Offshore (SBI) is a home-grown Singapore offshore services provider primarily engaged in distribution of offshore equipment with reputable brand name

to shipyards and other offshore players in the Asia-Pacific region. Through

investments, SBI has transformed itself to become a leading turnkey drilling equipment solution provider. We favour SBI because of 1) its leap to become Asia’s third turnkey drilling equipment solution provider for tender rigs, 2) growth prospects from its products and 3) clear undervaluation. Initiate with BUY at a TP of S$0.34 based on 9.9x industry average FY12 P/E. Catalysts include 1) more turnkey contract wins, and 2) move into the contract manufacturing market for offshore equipment manufacturers such as Aker.

Metamorphosis: Asia’s third turnkey drilling equipment solution provider. SBI has recently become the first ever Asian turnkey drilling equipment solution provider joining the ranks of drilling equipment giants like Aker and NOV. With its

maiden contract win of US$30m, SBI has found its niche in the smaller yet still lucrative tender rig market.

Share Performance (%)

Month

Absolute

Relative

1m

5.0

5.5

3m

16.7

12.3

6m

16.7

8.9

12m

(10.6)

(3.7)

6-month Share Price Performance

(S$)

0.25

0.20

0.25 0.20

0.15

0.10

 

0.05

-

26-Oct-11

26-Nov-11

26-Dec-11

26-Jan-12

26-Feb-12

26-Mar-12

Robust industry outlook provide growth prospects for all products segments. SBI is currently in possession of multiple OEM product lines, ranging from lifeboats to offshore cranes. In view of the robust prospects for the offshore

oil & gas industry, we believe that outlook for SBI remains bright.

10-fold earnings jump shows clear undervaluation. In view of the record orderbook of US$41m (5.8x of FY11 revenue) as well as its contract win momentum, we expect SBI’s earnings to surge 10-fold to US$3.2m this year and subsequently double again in FY13. Based on its forward earnings, SBI looks attractive at the current trading price of S$0.21, as its P/E will fall drastically to 6.2x in FY12, and further to 2.8x in FY13.

FYE 30 Dec (US$m)

FY09

FY10

FY11

FY12F

FY13F

Turnover Net profit % chg YoY Consensus EPS (S¢) DPS (S¢) Div Yield (%) ROE (%) ROA (%) P/E (x) P/B (x)

12.2

9.3

7.1

32.0

66.8

1.9

0.2

0.3

3.2

7.1

(16.1)

(91.7)

56.3

1168.3

124.3

Na

Na

Na

Na

Na

2.3

0.2

0.3

3.4

7.6

0.2

0.2

0.2

0.8

1.9

1.0

1.0

1.0

4.0

9.0

28.5

1.7

2.6

27.3

43.4

15.6

1.1

1.9

11.8

15.6

9.0

134.6

73.4

6.2

2.8

2.6

2.0

2.1

1.7

1.2

Source: Company data and DMG Estimates

DMG & Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporate finance or its dealing activities; this report is therefore classified as a non-independent report. Please refer to

important disclosures at the end of this publication.

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1

DMG Research

TABLE OF CONTENTS

TABLE OF CONTENTS Company Background 3 Industry Analysis 6 Investment Merits 10 Risks 11

Company Background

3

Industry Analysis

6

Investment Merits

10

Risks

11

Earnings Forecast

12

Valuation

14

Financial Tables

15

Appendix

16

Disclaimer

21

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2

COMPANY BACKGROUND

COMPANY BACKGROUND Established in 1994, and listed on the Catalist board of SGX since 2009, SBI

Established in 1994, and listed on the Catalist board of SGX since 2009, SBI Offshore (SBI) is a home-grown Singapore offshore services provider primarily engaged in marketing and distribution of offshore equipment with reputable brand name to shipyards and other offshore players in the Asia-Pacific region.

Through directly investing or partnering with strong offshore original equipment manufacturer (OEM), SBI has transformed itself to become a leading turnkey drilling equipment solution provider with strong engineering capabilities and OEM product lines.

Figure 1: SBI’s group structure

and OEM product lines . Figure 1: SBI’s group structure Since 2003, SBI has sold more

Since 2003, SBI has sold more than US$2 billion worth of products on behalf of its principals. This is largely thanks to SBI’s strong sales network with a geographical footprint that covers the globe, including countries like Singapore, China, Malaysia, Indonesia, Philippine, Vietnam, United States of America, and Brazil.

SBI specialises in the distribution of offshore drilling equipment, which is the most important component of an offshore rig, generally representing 60% of total construction costs. Most notably, it is the exclusive ASEAN-China distributor for Aker Solution’s drilling equipment division, which is the world’s second largest drilling equipment and systems provider. This means that all orders within the region would be handled by SBI, regardless of whether the customers go through SBI or Aker directly.

About Aker Solution

Listed on the Oslo Stock Exchange, Aker Solution is a large Norwegian oil services company that offers engineering, construction, maintenance, modification and operation services for new and existing oil & gas fields. As at end 2011, the company generated profits of NOK1.6 billion (S$347m) on the back of NOK36.5 billion revenue and hired 18,450 employees worldwide. It is ranked by CNN as one of the top ten most admired oil & gas services companies in the world.

Aker has 40 years of extensive experience from offshore drilling units, and is the world’s second largest drilling equipment and systems provider, with National Oilwell Varco (NOV) being the largest, generating US$14.6 billion (S$18.2 billion).

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3

Figure 2: Product lines

Principal / Associate / Subsidiary

Products

Aker Solution

Drilling Equipment

Jiangyin Neptune Marine Appliance (JNMA)

Lifeboat / Davit

RBV Energy Singapore

API Pipe/ Fitting / Manifold

Sea Reef Offshore (Sea Reef)

Deck Machinery / Offshore Load Handling System/ Offshore Crane

Source: Company data

Figure 3: 2011 revenue geographical breakdown

USA Others 1% 2% Singapore 32% Europe 46% China 5% Southeast Asia (Ex- Sing)
USA
Others
1%
2%
Singapore
32%
Europe
46%
China
5%
Southeast
Asia (Ex-
Sing)

14%

Source: Company data

Other than drilling equipment, SBI has access to multiple offshore OEM product lines ranging from lifeboats to offshore cranes. This access is gained through the acquisition of Sea Reef Offshore (100% subsidiary), a partnership with RBV Energy (50% joint-venture) and an investment in JNMA (associate with 35% stakes). While Sembcorp Marine (PPL shipyard, Jurong Shipyard) and COSCO (COSCO Nantong shipyard) are the direct customers for these products, end consumers include global oil & gas giants such as Atwood, Ensco, Maersk, Transocean and Seadrill.

Secured the first turnkey drilling equipment project

Leveraging on the enhanced engineering capabilities with recent investments as well as its established track record with Aker, SBI has been moving strategically up the value chain through the bidding for tender rig drilling equipment projects. It has recently won a turnkey tender rig drilling equipment solution project from a Southeast Asian customer worth in excess of US$30m.

We believe this is a great leap forward achieved by SBI, as the tender rig contract win acts as a strong testimonial to the group’s engineering and manufacturing capabilities. Under the contract, SBI will perform the entire engineering work in-house through its US Houston based subsidiary Sea Reef Offshore. While the key components such as the top drive, rotary table, mud pump and drawwork are to be purchased from Aker, the rest of the components will either be manufactured by SBI or sourced from third party manufacturers.

Figure 4: Tender rig drilling equipment solution package

Figure 4: Tender rig drilling equipment solution package Source: Company data  Derrick Set  Mud

Source: Company data

Derrick Set

Mud Processing equipment

Cement system

Lifting equipment

Power system

Blowout preventer

Instrumentation

Drillstring handling

Substructures

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4

OEM for drilling equipment in the future?

There is an underlying need for Aker and NOV to lower production costs and to better serve the Asian shipyards which account for the building of approximately 80% of all mobile offshore drilling units (MODUs) and construction units in the world. In view of this need, SBI is able to tap into this niche and create opportunities for these western offshore drilling equipment companies to outsource their production processes to Asia.

SBI has established a joint venture (30% stake) with Honghua Group (listed on the Hong Kong Exchange), China’s second largest land-rig builder, which specialises in contract manufacturing and fabrication services for offshore and marine equipment companies Benefiting from Honghua’s enormous production facilities as well as SBI’s in-depth knowledge in the offshore drilling equipment industry, the joint venture is expected to have significant first-mover advantage to become the first Asian contract manufacturer in the industry.

Apart from the partnership with Honghua Group, SBI also possess direct or indirect strong production capabilities with three manufacturing facilities in Jiangsu province, China, with total manufacturing area of more than 45,000 square metres. These facilities have been audited and approved by Aker to carry out subcontract work. Management is optimistic that once the turnkey tender rig project is executed successfully, SBI will be able to break into this lucrative contract manufacturing market.

Figure 5: SBI’s production facilities

market. Figure 5: SBI’s production facilities Jiangyin Neptune Marine Appliance Lifeboat Facility Source:

Jiangyin Neptune Marine Appliance Lifeboat Facility

Source: Company data

Marine Appliance Lifeboat Facility Source: Company data Jiangyin Neptune Lifeboat/Davit Facility Jiangyin SBI

Jiangyin Neptune Lifeboat/Davit Facility

Company data Jiangyin Neptune Lifeboat/Davit Facility Jiangyin SBI Offshore Equipment Facility OSK Research See

Jiangyin SBI Offshore Equipment Facility

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5

INDUSTRY ANALYSIS

INDUSTRY ANALYSIS Robust oil & gas industry outlook Demand for oil to outstrip supply. According to

Robust oil & gas industry outlook

Demand for oil to outstrip supply. According to Clarkson, global demand for oil will grow 1.5% YoY to 32.7 billion barrels underpinned by resilient economic growth in Asia. On the other hand, disrupted by unrest in Middle East & North Africa, global crude oil production will only grow 1.4% YoY to 30.5 billion in 2012. As such, demand will continue to outstrip supply by 1.8 billion barrels, providing strong support for the offshore exploration and production (E&P) spending. Consequently, spending sentiment of global oil majors and national oil companies remain bullish as they have provided very strong capex guidance, growing around 6-8% YoY in 2012.

Figure 6: Global oil demand & production mb/d % 92 4 90 3 88 86
Figure 6: Global oil demand & production
mb/d
%
92
4
90
3
88
86
2
84
1
82
80
0
78
-1
76
74
-2
2009
2010
2011
2012f

Global Oil Demand (LHS)

Global Crude Oil Production (LHS)76 74 -2 2009 2010 2011 2012f Global Oil Demand (LHS) Global Oil Demand YoY chg

Global Oil Demand YoY chg (RHS)

Global Crude Oil Production YoY chg (RHS)Crude Oil Production (LHS) Global Oil Demand YoY chg (RHS) Source: Clarkson Asian shipyards to dominate

Source: Clarkson

Asian shipyards to dominate the MODU market. Historically, approximately half of the MODUs such as jack-up rigs, semi-submersible platforms and drillships were constructed by either US or Singapore shipyards. According to Clarkson, the market now favours only Asia, with China and Korea aggressively snapping up market share and Singapore holding onto its strong position. Given that SBI is Aker’s exclusive ASEAN-China agent and Aker is estimated to have around 17% of the drilling equipment market share, we believe that SBI is in a very favourable position. As long as Aker continues to win drilling equipment contracts within this region (the most recent one being a jack-up rig to be built in a Chinese shipyard), SBI is poised to benefit.

Figure 7: MODU order book by country (unit) Singapore Other, 46 , 46 China, 31
Figure 7: MODU order book by country
(unit)
Singapore
Other, 46
, 46
China, 31
South
Korea, 52
Figure 8: SBI’s target market share (unit) SBI's Other, 40 market (ASEAN- China), 83 South
Figure 8: SBI’s target market share (unit)
SBI's
Other, 40
market
(ASEAN-
China), 83
South
Korea, 52

Source: Clarkson, as of 1 st Mar 2012

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6

Renewed interests in marginal field development provide opportunities.

We observe that, in the recent years, the number of start-up oil fields suffered a steep decline, despite the fact that a decent number of new fields are still being discovered every year. Such a phenomenon is more apparent within the Asia Pacific region which we attribute to the fact that many newly discovered fields were considered to be marginal fields, or fields that were not economically feasible to develop.

Figure 9: Global oil field discoveries and start-up (no. of fields)

200 160 120 80 40 0 2009 2010 2011
200
160
120
80
40
0
2009
2010
2011

New field discoveries(no. of fields) 200 160 120 80 40 0 2009 2010 2011 Start -up fields Source:

160 120 80 40 0 2009 2010 2011 New field discoveries Start -up fields Source: Clarkson

Start -up fields

Source: Clarkson

Figure 10: Asia Pacific oil field discoveries and start-up (no. of fields)

60 50 40 30 20 10 0 2009 2010 2011
60
50
40
30
20
10
0
2009
2010
2011

New field discoveries(no. of fields) 60 50 40 30 20 10 0 2009 2010 2011 Start -up fields

40 30 20 10 0 2009 2010 2011 New field discoveries Start -up fields However, in

Start -up fields

However, in view of higher crude oil prices, depleting brown field reserves and lower discovery rates of large green fields, development of marginal fields within this region has gained popularity underpinned by a strong government support.

For instance, Malaysia currently has 106 marginal oil fields containing 580 million barrels of oil and Petronas plans to develop 27 of them, with the Berantai fields and Balai cluster already contracted to be developed. Similarly, the Indonesia government also foresees a decline in oil & gas production and has identified 52 marginal fields for development.

Since the cost of drilling the wells make up a sizable portion of the marginal field development cost, choosing the right drilling rig is important. According to a research paper published by Society of Petroleum Engineers, tender rig is a better choice to enhance economics, due to its low development cost as well as its mobility in servicing multiple wells in close proximity.

Therefore, demand for tender rig has been strong and we expect this to persist for the next few years given the interest in marginal field developments. Seadrill, for instance, owns 16 tender rigs at the moment with the majority of them operating in marginal fields in Southeast Asia. It has recently ordered another tender barge worth of US$135m from COSCO. This is on top of the three tender barges that are under construction and another semi-sub tender rig building in Keppel FELS.

About Tender Rig

As opposed to platform rig, facilities required to support the drilling operation such as power, living quarters, etc, are located on the tender, while actual drilling equipment such as the derrick, topdrive, blowout preventer, etc are installed on the platform. As such, the design load and required deck area of using a tender rig is only about one quarter of that of a platform rig of comparable capacity. Hence, the cost of constructing a tender rig is significantly lower than that of other rigs. There are two types of tender rig, with the barge type fit for shallow water, and the more powerful semi-submersible type suitable for deep water.

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7

Figure 11: Cost comparison between tender rig and other MODUs

 

Drillship or

Semisub

Jack-up

Tender

Semisub

Tender

barge

 

rig

 

Average day rates (US$/day)

500,000

170,000

145,000

115,000

Average construction cost (US$m)

600

200

200

115

Source: Seadrill

Since the building costs for tender rigs are much lower compared to other MODUs, it tends to carry a lesser amount of drilling equipment with a simpler design. As such, big players such as NOV and Aker places less emphasis on this market. SBI spotted the opportunity and managed to partner with Aker to provide turnkey solutions with competitive pricing and customisation flexibility. We believe the recent contract win will open up more opportunities for such type of turnkey project in the future.

Figure 12: Offshore drilling & completion capex (US$m)

1400 1200 1000 800 600 400 200 0 2009 2010 2011 2012 Source: Frost &
1400
1200
1000
800
600
400
200
0
2009
2010
2011
2012
Source: Frost & Sullivan

Niche offshore lifeboat market

PhilippinesSource: Frost & Sullivan Niche offshore lifeboat market Malaysia Indonesia India China Australia Because of the

Malaysia& Sullivan Niche offshore lifeboat market Philippines Indonesia India China Australia Because of the recent

IndonesiaSullivan Niche offshore lifeboat market Philippines Malaysia India China Australia Because of the recent occurrence of

Indiaoffshore lifeboat market Philippines Malaysia Indonesia China Australia Because of the recent occurrence of offshore

Chinalifeboat market Philippines Malaysia Indonesia India Australia Because of the recent occurrence of offshore

Australialifeboat market Philippines Malaysia Indonesia India China Because of the recent occurrence of offshore disasters,

Because of the recent occurrence of offshore disasters, companies are placing increasingly importance on the safety and survival of personnel. Consequently, along with the boom of the offshore market, comes a huge demand for life-saving appliance. SBI’s associate JNMA focus on the higher-end, large-capacity (>60 people) lifeboat market as opposed to the highly competitive self-rescue boat (small capacity) and the liferaft (collapsible without a motor) market. This market is currently dominated by three international players, namely, Norsafe, Schat-Harding and JNMA with estimated world- wide sales of around 1500 sets, or US$200m last year.

Generally, every new additional offshore fleet such as drilling rig or production unit will require three to four sets of lifeboat sufficient for all of the passenger and crew on board to perform emergency evacuation. Furthermore, the International Maritime Organisation (IMO) has been tightening safety requirements in the past few years through the International Convention for the Safety of Life at Sea (SOLAS) treaty. Most notably, the assumed weight of persons on lifeboat was increased from 75kg to 82.5kg from July 2010 onwards, resulting in a new round of lifeboats purchases.

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8

Figure 13: World offshore fleet (unit)

20000 18000 16000 14000 12000 10000 8000 2008 2009 2010 2011
20000
18000
16000
14000
12000
10000
8000
2008
2009
2010
2011

Offshore mobile fleet16000 14000 12000 10000 8000 2008 2009 2010 2011 Offshore fixed production structures Source: Clarkson Figure

Offshore fixed production structures10000 8000 2008 2009 2010 2011 Offshore mobile fleet Source: Clarkson Figure 14: Offshore lifeboat volume

Source: Clarkson

Figure 14: Offshore lifeboat volume market share

Other

3% JNMA 17% Norsafe 45% Schat - Harding 35%
3%
JNMA
17%
Norsafe
45%
Schat -
Harding
35%

Source: Company data and DMG estimates

While ship-launched lifeboat (lowered into water by davits from deck) is priced around US$500,000 to US$750,000 per set, freefall lifeboats (which drops instantly into water from deck) can cost as much as US$8m per set. Despite JNMA selling 250 lifeboat sets last year, the revenue it generated was five to six times lesser compared to that of Norsafe’s, due to the absence of freefall lifeboat contribution. Though JNMA was capable of producing freefall lifeboats, the majority of the demand for such advanced lifeboats came only from the Norwegian sea market which JNMA was not qualified for formerly. Now with the necessary licences, JNMA is able to unlock this lucrative Norwegian market. We would therefore expect JNMA to make strong contribution towards SBI starting from 2013 onwards.

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9

INVESTMENT MERITS

INVESTMENT MERITS Metamorphosis: Asia’s third turnkey drilling equipment solution provider. Leveraging on its

Metamorphosis: Asia’s third turnkey drilling equipment solution provider. Leveraging on its Houston-based engineering house as well as its strong ties with Aker, SBI has recently become the first ever Asian turnkey drilling equipment solutions provider joining the ranks of Aker and NOV. Recognising the importance of cost savings in developing marginal fields, SBI provides a lower cost turnkey solution that includes engineering as well as construction of the derrick equipment set. Their niche is the smaller yet still lucrative tender rig market and SBI has proven its worth with its maiden contract win of US$30m.

Robust industry outlook provide growth prospects for all products segments. Through a series of investments and acquisitions, SBI has also gained possession of multiple OEM product lines, ranging from lifeboats to offshore cranes. In view of the robust offshore oil & gas industry outlook, we believe that outlook for SBI’s products to remain bright given its clear focus in Asia where more than 80% of the MODUs are being built. With SBI’s strong sales network with customers including Sembcorp Marine, COSCO Shipyard, Daewoo, Hyundai and end customers consisting of global oil & gas giants, SBI’s earnings are poised to improve even further.

10-fold earning jump shows clear undervaluation. In view of the record orderbook of US$41m (5.8x of FY11 revenue) as well as its contract win momentum, we expect SBI’s earnings to surge 10-folds to US$3.2m this year and subsequently double again in FY13. Thus, based on its forward earnings, SBI looks attractive at the current trading price of S$0.21, as its P/E will fall drastically to 6.2x in FY12, and further to 2.8x in FY13.

Figure 15: Earnings surge while P/E collapses

8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY10 FY11 FY12f FY13f PATMI (US$m)
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
FY10
FY11
FY12f
FY13f
PATMI
(US$m) - LHS
P/E (x) - RHS
Source: Company data and DMG estimates

160.0

140.0

120.0

100.0

80.0

60.0

40.0

20.0

0.0

Healthy balance sheet to provide growth opportunities. As of FY11, SBI’s balances sheet remains healthy despite the numerous investments. With little borrowings and a net cash position, SBI has room to weather through any unexpected storms. SBI is also well positioned to gear up to capture the potentially significant growth opportunities that we see available. If successful, SBI’s position as Asia’s third turnkey drilling solutions provider will be solidified.

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10

INVESTMENT RISKS

INVESTMENT RISKS Being largely dependent on Aker. The bulk of the revenue which SBI is expected

Being largely dependent on Aker. The bulk of the revenue which SBI is expected to generate is largely related to Aker’s drilling equipment. As such, SBI’s success is largely reliant upon Aker’s performance with the latter currently facing intense competition from NOV. Moreover, in the event that Aker chooses not to renew SBI’s representative agreement (SBI has an option to extend until late 2013), we expect SBI business to be adversely impacted. Management have recognised this critical risk and have successfully diversified SBI’s revenue streams with ownership in other offshore equipment companies such as those manufacturing lifeboats, high pressure pipes and fittings as well as offshore cranes and deck machinery. By providing turnkey equipment solutions in Asia, it has become one of Aker’s customers and it is supporting Aker with lower-cost contract manufacturing in Asia.

Project execution risk. Currently, SBI has no record in the execution of turnkey drilling equipment project. However, as SBI enjoys good relationship with Aker and Aker understands this is SBI’s first turnkey project, Aker will be providing strong support. As such, the US$30m tender rig project will be a good testing ground for the group to demonstrate its abilities, opening up more doors in the future. Though there is a risk that the project may not adhere keenly to the proposed timeline, management is confident about its engineering capabilities as well as its experienced project management team, many of whom have come from major rigbuidling yards in Singapore.

Industry demand tends to be cyclical. Being in the offshore oil & gas industry, demand for SBI’s products and services are generally related to the E&P spending and crude oil prices which ultimately depends on global economics. Though we expect E&P spending to remain resilient, any unexpected downturn in economy could impact SBI’s business.

Low free-float result in poor liquidity. Currently, SBI’s founder Mr David Tan and chairman Mr Jonathan Hui owns more than 74% of the company. As such, free float is low at 26%, resulting in poor liquidity with average volume of only 23 lots in the past three months. However, for long-term investors, large management ownership could also indicate that the insiders are upbeat over the group’s prospects.

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11

EARNINGS FORECAST

EARNINGS FORECAST Achieved record orderbook. Boosted by the maiden turnkey drilling equipment contract win, SBI ’s

Achieved record orderbook. Boosted by the maiden turnkey drilling equipment contract win, SBI’s orderbook stood at a record high of US$41m as of end Feb 2012, which is equivalent to 5.8x of FY11 revenue. The US$30m turnkey project is expected to be carried out in the next 18 months and orders for other product categories are to be fulfilled and recognised within the next 3 12 months.

Prospects remain bright across all products segments. Most notably, SBI is currently bidding for its second turnkey drilling equipment contract, a semi-submersible tender rig, in excess of US$40m. Given the robust E&P spending and the SBI’s strong network with the Asian shipyards, we opine that it is a matter of time before SBI secures its second turnkey contract. On the other hand, its UK branded (RBV) piping products had recently entered up the Korean market, while its JNMC lifeboats are en route into the lucrative Norwegian Sea. Last but not least, demand for its Houston-based subsidiary Sea Reef’s engineering services and offshore equipments remain robust, as it has been servicing some of the world-class US drilling company. As such, we expect order winning momentum to continue across all products segments.

Figure 16: Orderbook breakdown as of end Feb 2012

Sea Reef, US$2m RBV, US$5m JNMC, US$4m Turkey project, US$30m
Sea Reef,
US$2m
RBV,
US$5m
JNMC,
US$4m
Turkey
project,
US$30m

Source: Company data and DMG estimates

Figure 17: Expected order wins (US$m) 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0
Figure 17: Expected order wins (US$m)
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2012f
2013f
Turkey project
Aker
JNMC
RBV
Sea Reef

Net margin to improve; on track for record performance. Previously, SBI acted mainly as a distributor, booking only an agent’s fees as revenue. Hence, gross margin reached a high of 52.9% in FY11. However, as a result of high G&A expenses and new business start-up costs, net margins have remained at the low single digits.

Figure 18: Margins

60%

50%

40%

30%

20%

10%

0%

FY10 FY11 FY12F FY13F Gross margin Net margin
FY10
FY11
FY12F
FY13F
Gross margin
Net margin
Figure 19: Revenue & profits 80 70 60 50 40 30 20 10 0 FY10
Figure 19: Revenue & profits
80
70
60
50
40
30
20
10
0
FY10
FY11
FY12F
FY13F
Revenue
Profits

Source: Company data and DMG estimates

Source: Company data and DMG estimates

OSK Research

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Moving on, since SBI has transformed to become a turnkey solution provider, we expect its gross margin to decrease as the group will book in the full revenue and cost for the equipment. However, net margin is forecasted to increase significantly to around 10% in the absences of further G&A expenses and other start-up costs. Furthermore, we expect business to pick up for the group’s RBV joint-venture as well as JNMC associate, contributing significantly to the bottom line. As such, we expect the group to achieve record revenue and profits from 2012 onwards.

Working capital to be funded by account payable and borrowings. With the surge in revenue, working capital needs are expected to grow. However, SBI expects the majority of the project financing to come from the customer as well as credit lines provided by banks. Meanwhile, given its net cash position as of end FY11, SBI has room to gear up in funding its working capital needs as well as the maintenance capex needs which is approximately US$1.5m/year.

Expecting more dividends. Despite minimum profitability for the past two years, SBI had still been paying out consistent dividends of 0.2S¢/share every year, equivalent to more than 80% of its earnings. In view of the 10-fold increase in profits, we forecast the group to distribute 25% of its earnings out as dividends, translating to 0.8S¢/share for FY12 and 1.9S¢/share for FY13. This implies dividend yield at 4% and 9% respectively.

Figure 20: Working capital & borrowings (US$m) 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0
Figure 20: Working capital & borrowings (US$m)
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
FY10
FY11
FY12F
FY13F
Inventory
Receivables

Payables0.0 FY10 FY11 FY12F FY13F Inventory Receivables Short-term borrowings Source: Company and DMG estimates

Short-term borrowingsFY10 FY11 FY12F FY13F Inventory Receivables Payables Source: Company and DMG estimates Figure 21: EPS &

Source: Company and DMG estimates

Figure 21: EPS & DPS (S¢)

8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY10 FY11 FY12F FY13F EPS DPS
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
FY10
FY11
FY12F
FY13F
EPS
DPS
Source: Company and DMG estimates

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VALUATION

VALUATION SBI is the only qualified Asian company that is able to bid together with NOV

SBI is the only qualified Asian company that is able to bid together with NOV and Aker in bidding for the smaller yet lucrative tender rig turnkey drilling equipment package. While it is not feasible to compare SBI directly with the only two world-class drilling equipment providers, we choose to use the broader offshore oil & gas service peers that are listed in Singapore in valuing the company.

Trading below peer average, initiating coverage with a BUY. At the current price of S$0.21, SBI is now trading at only 6.2x FY12F P/E and 2.8x FY13F P/E based on our earnings forecasts. Given its superior ROE and dividend yields, we believe SBI should trade above its peer’s average of 9.9x, translating to a TP of S$0.34 (61% upside).

Figure 22: Peer financial comparison table

Company Name

Market

FYE

Net Margin

ROE

P/E (x)

Dividend

Cap as of

Curr FY

Nex FY

Curr FY

Nex FY

Curr FY

Nex FY

Yield

(S$m)

Curr FY

SBI OFFSHORE LTD

25.6

Dec

9.9%

10.60%

27.4%

43.4%

6.2

2.8

4.0%

KREUZ HOLDINGS

186.6

Dec

20.6%

21.2%

22.1%

19.3%

4.5

3.9

0.0%

NORDIC GROUP

41.2

Dec

8.4%

9.2%

13.5%

14.6%

7.4

6.1

4.9%

HEATEC JIETONG

13.1

Dec

2.5%

Na

4.2%

Na

12.0

Na

2.8%

IEV HOLDINGS LTD

129.9

Dec

15.1%

11.2%

39.9%

36.6%

6.0

5.8

0.0%

FALCON ENERGY GR

223.9

Dec

19.9%

35.0%

9.8%

15.2%

12.2

Na

0.0%

DYNA-MAC HOL LTD

405.1

May

12.8%

12.6%

16.5%

16.6%

18.8

16.7

4.4%

TECHNICS OIL &

204.0

Sep

13.7%

15.1%

37.6%

33.7%

8.7

8.3

8.7%

Industrial Average (Ex SLA)

   

13.3%

17.4%

20.5%

22.7%

9.9

8.2

3.0%

Source: Bloomberg and DMG estimates

Figure 23: Historical forward P/E valuation 200 180 160 140 120 100 80 60 40
Figure 23: Historical forward P/E valuation
200
180
160
140
120
100
80
60
40
20
0
valuation 200 180 160 140 120 100 80 60 40 20 0 Forward P/E Average +1

Forward P/E

200 180 160 140 120 100 80 60 40 20 0 Forward P/E Average +1 S.D.

Average

160 140 120 100 80 60 40 20 0 Forward P/E Average +1 S.D. Source: Company

+1 S.D.

Source: Company data and DMG estimates

P/E Average +1 S.D. Source: Company data and DMG estimates -1 S.D. OSK Research See important

-1 S.D.

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FINANCIAL TABLES

FINANCIAL TABLES Figure 24: Profit and loss FYE 31 Dec (US$ m) FY09 FY10 FY11 2012F

Figure 24: Profit and loss

FYE 31 Dec (US$ m)

FY09

FY10

FY11

2012F

2013F

Revenue

12.2

9.3

7.1

32.0

66.8

Cost of sales Gross profit General & Admin expenses Other income

(8.0)

(5.9)

(3.4)

(26.8)

(54.3)

4.2

3.4

3.8

5.3

12.5

(1.9)

(3.5)

(3.8)

(2.5)

(5.3)

0.2

0.2

0.4

0.0

0.0

Share of profit of associates / JVs EBIT Interest expenses PBT income tax

0.2

0.2

0.2

1.2

1.5

2.8

0.3

0.6

4.0

8.7

(0.4)

(0.1)

(0.1)

(0.2)

(0.3)

2.4

0.2

0.5

3.7

8.4

(0.4)

(0.1)

(0.2)

(0.6)

(1.3)

MI

(0.0)

0.0

(0.0)

0.0

0.0

PATMI

1.9

0.2

0.3

3.2

7.1

Source: Company data and DMG estimates

 

Figure 25: Balance sheet

FYE 31 Dec (US$ m)

FY09

FY10

FY11

2012F

2013F

Total Assets Fixed assets Other long-term assets Inventory Receivables Other short-term assets Cash and short-term investment Total Liabilities Short term borrowings Payables Other short-term liabilities Long-term liabilities Shareholder's funds Minorities

12.4

14.6

13.1

27.0

45.7

1.2

5.7

5.3

6.3

7.3

2.0

3.6

4.2

5.3

6.8

0.2

0.2

0.4

5.4

10.9

5.5

3.0

1.7

9.6

20.0

0.0

0.2

0.0

0.0

0.0

3.5

1.9

1.6

0.4

0.6

5.5

5.4

3.5

15.3

29.2

1.7

1.5

1.2

3.2

4.7

3.1

3.8

2.3

12.0

24.4

0.5

0.0

0.1

0.1

0.1

0.0

0.0

0.0

0.0

0.0

6.8

9.3

9.5

11.6

16.4

0.1

0.1

0.1

0.1

0.1

Source: Company data and DMG estimates

 

Figure 26: Cash flow

FYE 31 Dec (US$ m)

FY09

FY10

FY11

2012F

2013F

PBT Depreciation & amortization Change in working capital Operating cashflow Capex & acquisitions Free cashflow New borrowings Share issuance Dividends paid Net cashflow

2.4

0.2

0.5

3.7

8.4

0.3

0.3

0.4

0.5

0.5

0.5

3.2

(0.4)

(3.2)

(3.6)

2.5

2.9

(0.3)

(0.4)

2.6

(0.6)

(6.2)

(0.7)

(1.5)

(1.5)

2.0

(3.3)

(1.0)

(1.9)

1.1

(0.0)

(0.3)

(0.3)

2.0

1.5

3.6

2.3

0.0

0.0

0.0

(1.0)

(0.3)

(0.2)

(1.0)

(2.3)

2.2

(1.8)

(0.3)

(1.0)

0.3

Source: Company data and DMG estimates

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15

APPENDIX 1: DIRECTORS’ PROFILE

APPENDIX 1: DIRECTORS’ PROFILE Name Position Background Mr Executive  Appointed since March 2008,

Name

Position

Background

Mr

Executive

Appointed since March 2008, responsible for the daily overall management

Jonathan

Chairman and

Hui

CEO

Possessed 30 years of experience in the financial and business sector

 

Pror to joining SBI, Mr Hui co-founded the Swanlin Asia Group, a venture capital firm, in 2005 and was responsible for business development and finance for business development and finance

He was also a Director at Aviation and Electronics Support Pte. Ltd. Singapore (2001-2003)

He was an audit senior with Arthur Andersen, United Kingdom (1980-1983), senior manager with Arthur Andersen, Singapore (1983-1989), Vice- President of Merrill Lynch (1990-1994) and Executive Research Director of UBS Securities in

1994

Mr David

Executive

Founded SBI in 1994

Tan

Director

Since 1 July 1997. He is responsible for securing agency contracts from Aker MH of Norway to market its range of drilling equipment in Asia, including Singapore

 

Prior to establish the company, Mr. Tan was a manager in the rig-building commercial department of Keppel FELS Limited and was involved in cost estimations and marketing of rig-building services

Subsequently, he was the manager of Sea Scan International where he was involved in the procurement of equipment and accessories for the ship building and/or ship repairing activities of Keppel Group

He was also the business manager of Aker MH for the China market from 2007 to 2008

Ms Chen

Alternate

From 2007 to 2009, Ms. Chen was the group’s Executive Director and was responsible for operational, human resources and finance matters

Jiayu

Director to

David Tan

Mr Giang

Lead

Held the position of SBI’s Lead Independent Director since September 2009

Sovann

Independent

Director

Mr Giang is currently the Executive Director of the Singapore

Prior to that, he had been appointed as the Finance Director and General Manager of Dowty Aerospace, Executive Director and Regional Financial Controller of Golden Polindo Industries Group

He was also the Chief Financial Officer of the Singapore Island Country Club, Innovalues Limited and Sunmoon Food Company Limited

Graduated with a Bachelor of Administration degree with great distinction from University of Regina, Canada

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Mr Chan

Independent

Held the position of SBI’s Independent Director since September 2009

Lai Thong

Director

 

Mr Chan has about 30 years of international

marketing and business development experience in several industries, particularly in the offshore and marine industry

He is currently a Director of several private companiesincluding Weatherock China Ltd, Chongqing Panxin Industry Company Ltd, and Sichuan Bangkok Investment

Prior to that, he was with the Keppel Group and was a Group General Manager in both Keppel Corporation Ltd and Keppel Offshore & Marine Ltd and help to develop the markets in Southeast Asia, Middle East, Bulgaria, Azerbaijan and Kazakhstan

Graduated from the National University of Singapore with a Bachelor of Science (Honours) in

1980

Mr Wong

Independent

Appointed since September 2009

Kok Hoe

Director

Mr. Wong is also the Group Chief Operating Officer of the Centurion Group which primarily engage in fund management, private equity investments and property development and investments

He is also a director of various public listed companies in Singapore

Prior to this, he was a partner in a local advocates and solicitors firm with more than 18 years of experience in legal practice, mainly in the areas of corporate law and corporate finance

mergers and acquisitions and venture capital.Mr. Wong holds a Bachelor of Laws (Honours) degree from the National University of Singapore

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APPENDIX 2: PRODUCT CATALOGUE

APPENDIX 2: PRODUCT CATALOGUE Aker Solution’s Drilling Equipment Source: Aker Solution OSK Research See important
APPENDIX 2: PRODUCT CATALOGUE Aker Solution’s Drilling Equipment Source: Aker Solution OSK Research See important

Aker Solution’s Drilling Equipment

2: PRODUCT CATALOGUE Aker Solution’s Drilling Equipment Source: Aker Solution OSK Research See important disclosures
2: PRODUCT CATALOGUE Aker Solution’s Drilling Equipment Source: Aker Solution OSK Research See important disclosures

Source: Aker Solution

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JNMA’s Lifeboat

Free Fall Lifeboat

JNMA’s Lifeboat Free Fall Lifeboat Totally Enclosed Lifeboat Partially Enclosed Lifeboat OSK Research See important

Totally Enclosed Lifeboat

Lifeboat Free Fall Lifeboat Totally Enclosed Lifeboat Partially Enclosed Lifeboat OSK Research See important

Partially Enclosed Lifeboat

Totally Enclosed Lifeboat Partially Enclosed Lifeboat OSK Research See important disclosures at the end of this

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Sea Reef’s Offshore Equipment

Cranes

Sea Reef’s Offshore Equipment Cranes Deck / Handling Equipment Winches and Hoists RBV Energy API Pipes,

Deck / Handling Equipment

Reef’s Offshore Equipment Cranes Deck / Handling Equipment Winches and Hoists RBV Energy API Pipes, Fittings,

Winches and Hoists

Cranes Deck / Handling Equipment Winches and Hoists RBV Energy API Pipes, Fittings, Manifolds OSK Research
Cranes Deck / Handling Equipment Winches and Hoists RBV Energy API Pipes, Fittings, Manifolds OSK Research
Cranes Deck / Handling Equipment Winches and Hoists RBV Energy API Pipes, Fittings, Manifolds OSK Research
Cranes Deck / Handling Equipment Winches and Hoists RBV Energy API Pipes, Fittings, Manifolds OSK Research

RBV Energy

Deck / Handling Equipment Winches and Hoists RBV Energy API Pipes, Fittings, Manifolds OSK Research See
Deck / Handling Equipment Winches and Hoists RBV Energy API Pipes, Fittings, Manifolds OSK Research See
Deck / Handling Equipment Winches and Hoists RBV Energy API Pipes, Fittings, Manifolds OSK Research See

API Pipes, Fittings, Manifolds

Winches and Hoists RBV Energy API Pipes, Fittings, Manifolds OSK Research See important disclosures at the
Winches and Hoists RBV Energy API Pipes, Fittings, Manifolds OSK Research See important disclosures at the
Winches and Hoists RBV Energy API Pipes, Fittings, Manifolds OSK Research See important disclosures at the

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DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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