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Saturday, April 25, 2009

SEALINK International >>> Rising With The Tides

An integrated marine service provider. Sealink International was founded by Mr Yong Foh Choi in 1974. Mr Yong is also one of the founders of Bumi Armada Navigation Sdn Bhd. The company is currently headed by Mr Yong as Managing Director and his son, Mr Yong Kiam Sam as Deputy MD. Sealink started as a vessel chartering service provider, servicing the non-oil & gas industries such as the navy, fishing, and mining sectors. In 1997, it started the shipbuilding business, which is now its core revenue generator with a contribution of more than 70%.

The shipbuilding segment. Sealink owns 2 shipyards on 31.4 acres in Miri, Sarawak that have the capacity to manufacture up to 15 vessels a year. Capacity is currently almost fully utilised. Over the years, the company has built 26 vessels, mainly landing craft, multi-purpose supply vessel, crew boats, and tug boats. Sealink adopts a “build and sell” concept, which enhances its bargaining power due to the shorter lead time to deliver the vessels to customers and also its ability to capture closer to spot market price for vessels, which is trending upwards. For comparison, the construction of an ordinary vessel normally takes 10 to 16 months if it is built upon order. However, with the “build and sell” concept, Sealink is able to deliver vessels in 3 to 6 months.

The chartering segment. Sealink also “builds and charters” some of the vessels that it constructs. Currently the company has a fleet of 29 vessels, made up mostly of tugboats, barges and landing craft for general purposes. As such, the average charter income is slightly lower. However, given that 65% of its vessels is less than 5 years old and the average age profile is only 6.5 years, the reliability and efficiency of the fleet would
give it a competitive edge. Also, since the majority of its chartering contracts is short-term in nature, their rates are normally higher than that for long-term charters.

Going deepwater. To strengthen the company’s position in the shipbuilding market, about RM50m to RM100m will be spent to upgrade and purchase automated machinery over the next 3 years. Management
hopes to improve its current production efficiency and venture into the deepwater vessel segment in view of strong demand as well as better profit margins. Currently, its 2.7-acre, smaller yard in Krokop Road, Miri can only support the construction of shallow water vessels. With the upgrade for the 28.7-acre yard in Kuala Baram, Miri, the company can undertake the construction of deepwater vessels as the yard is in deep waters.

Upon completion, its annual shipbuilding capacity is expected to increase from 15 vessels to 20 vessels, a growth of 33%.

Fleet for charter. The company is expected to enlarge its fleet to more than 40 vessels from 29 vessels currently, and further diversify into other vessel types such as landing craft of up to 72m, tug boats and up to 12,000 brake horsepower anchor handling tug supply vessels with dynamic positioning (DP) systems. Higher BHP vessels with DP systems can operate in deepwater oilfields and fetch better charter rates. Already, the company has acquired 2 oil/chemical carriers that will be delivered in 2010. Most vessels are now generally chartered for the transportation of structures and pipes, and support of offshore construction activities. Going forward, gross margins for the chartering segment are expected to hover between 55% and 57%. The outlook for daily charter rates is still favourable, driven by robust demand for marine services to support repair and maintenance as well as offshore exploration and development activities in the region.

Order backlog only at RM325.5m. Our bullish view on the stock is somewhat tempered by its weak current orderbook of only RM326m, given the revenue base of RM213m stated in its prospectus. This means that its earnings visibility is only for 1.5 years, as about 65% of its orderbook will be recognised in FY08 earnings. The company’s ability to replenish its orderbook hence appears crucial to sustaining earnings growth. However, several factors may provide some level of comfort:

• 80% revenue from overseas: About 80% of Sealink’s revenue comes from overseas, such as Europe, Egypt and Australia. This reduces its dependence on contracts from local players.
• Recurring business from major customers: Sealink has established a good relationship with its major foreign customers and receives repeat orders from time to time.

Positive prospects. We are forecasting a net profit of RM46.8m for FY08, comparing against management’s projection of RM50m on the back of RM213m revenue. Our estimate suggests a 14% growth in earnings, supported by a favourable industry outlook. We see demand for offshore support vessels remaining robust given the swift expansion in exploration and development in all of the region’s oil & gas hotspots such as Malaysia, Vietnam, Indonesia and Thailand. Vessel chartering rates and the market prices of vessels are on the rise. Even the slow arrival of engines, parts and equipment, which causes delays, is no longer an issue since it’s now a seller’s market.
A small bargain at 12.5x PE. At an issue price of RM1.25, Sealink is to be listed at 12.5x PE. Our fair value for the stock is RM1.50, applying a 16x PE against our FY08 EPS forecast. We only use Coastal Contracts for comparison given the similarity in their businesses. For exposure to the manufacture of offshore support vessels, we prefer Coastal given its more compelling valuation multiple of only 9x and stronger earnings support from its orderbook.

NOTE : Price of Coastal Contract @ RM1.44 ( 24 April 2009 )which is 2.75 X SEALINK @0.525 (24 April 2009) but does the disparity justifies the biz? ZL sees potential in SEALINK prices which had plummeted since it's listing high 1.19 yr 2008. ZL analysed an 88sen traget for SEALINK midterm hold. The tide is coming in >>> slowly but surely. Recommend BUY ON DIP.

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