This article first appeared in The Edge Financial Daily, on December 15, 2015.

Icon Offshore Bhd
(Dec 14, 35 sen)  
Maintain buy with an unchanged target price (TP) of 42 sen: Icon Offshore Bhd is on a roll. The charter win for its utility tug vessel is its seventh win for 2015. The daily charter rate (DCR) and tenure are better than we initially expected. Cost management is progressing well — we estimate that Icon can still take another 20% hit on the DCR, and still survive and be cash-flow “neutral”. Icon offers a unique mergers and acquisitions (M&A) perspective (absent from its peers), a major rerating catalyst. Our TP, based on one times enterprise value (EV)/replacement value methodology, offers a 22% upside. 

This firm offshore supply vessel (OSV) contract is valued at RM22 million and commenced its charter on Oct 21, 2015. We are encouraged by this job win, from the perspective of the contract tenure, charter value and OSV utilisation. Icon’s ability to secure a second successive five-year charter from its existing client is a major coup in this downcycle, and this reflects the customer’s confidence in its OSV/crew quality. 

While the RM20,000 DCR is similar to that of its previous charter, the rate in ringgit terms (OSV contract is in US dollars) is 11% above our earlier estimate of RM18,000. For this, we have marginally raised our 2016 to 2017 net profit forecasts by 1%, on a higher DCR (+11%) and utilisation of this utility vessel (+50 percentage points). 

For 2016, Icon targets to improve its overall OSV utilisation (61% in nine months of financial year 2015). Being a Malaysia Offshore Support Vessels Association (Mosva) member is a key positive. Petroliam Nasional Bhd has tightened its tender vetting criteria and is giving charter preference to local, Mosva OSV operators. The ratio of local to foreign OSVs in Malaysia is relatively even now. The recent appointment of a new managing director and chief operating officer is a confidence-boosting move to its franchise value and corporate governance. One of the managing director’s key performance indicators is to increase shareholders’ value. Values are emerging. Icon trades at 0.4 times book and 0.9 times EV/replacement value without taking into consideration potential value unlocking via the M&A route, an aspect unique to Icon. — Maybank IB Research, Dec 14