NRA Capital Pte Ltd

Written by: NRA Team

Friday 13 Nov 2015

Triyards – Takeaways from management briefing

Diversification into new vessel classes and products provides brighter outlook for Triyards in a declining oil market environment

Management highlights the setting up of new product lines to take advantage of cyclicality in the oil markets.

Triyards, an owner/operator of fabrication yards in Ho Chi Minh City and Vung Tau in Vietnam, with design and engineering facilities in Houston, United States and Singapore, held an analyst briefing on the 20th of October to discuss its 4Q15 (Year Ended August) results. We had a brief sit down with management after going over the results in order to go over several more details of the company and gain a clearer picture on the specific developments Triyards is undertaking to stay ahead of a challenging offshore sector.

Financial highlights

Triyards saw positive performance for its FY15 overall.  Gross profit increased 16% yoy to US$60.0m from US$51.9m, but this was offset by higher administration, tax and interest expenses. As a result, net income only grew by 2% yoy to US$27.2m from US$26.7m.

The bigger difference in the yoy performance for Triyards was the changes in its cash flow, particularly the effect of lower trade receivables on the free cash flow. FY15 FCF was US$22.3m, compared with negative US$5.9m for FY14. Positive cash from operations allowed Triyards to pay off a portion of its debts, resulting in a reduction of net gearing to 29.8% from 51.2% in FY14.

Despite this improvement in the cash position and general health of the company, Triyards kept its year end dividend per share at S$0.01, unchanged from FY14. This was due to the management’s assessment that uncertainty in the industry necessitated a prudent conservation of capital.

Order book status                                                               

Triyards won approximately US$450m worth of orders over FY15, significantly higher than the approximately US$171m in orders it won in FY14. This 163% increase in order win rate improves the revenue visibility for Triyards significantly. The timeframe for the order delivery periods indicates that Triyards has solid revenue visibility going well into FY18. Triyards  further announced that they had secured an additional US$100m worth of orders in October, after the end of the financial year. All in all, Triyards states that their net orderbook at 20 October 2015 was US$564m. 

Shipyard outlook

One of the major problems facing shipyards globally is that there was a rush to develop shipbuilding capacity before 2008 as shipping rates rose across all vessel categories. Following the 2008 financial crisis, shipping rates collapsed, and new orders fell drastically. In that environment, the Korean and Japanese yards maintained a quality premium that left new yards built in China and South America wanting for orders.

Figure 1Baltic Dry and Brent Crude

 

Source: Bloomberg                                                                                                                              

The main factor that revitalized these shipyards, was the rapid recovery of oil prices post-2008. The higher oil prices made offshore drilling economically viable, and yards with spare capacity began to retool themselves into offshore rig and offshore support vessel building. This was the direct cause for the rapid rise in specialized vessels that were conducting operations in increasingly difficult waters, such as North Sea, and which required increasingly complex vessels that had features such as dynamic positioning capability.

Right now, the fall in oil prices is once again forcing the industry to shift gears. Where offshore oil rigs were the shining gem in the shipbuilding industry but a year ago, now offshore oil rigs are increasingly problematic. Exploration and production investment is falling as the high costs of operating offshore drilling platforms in open or rough waters makes it unattractive to attempt extracting oil at the current low prices.

Bunker and marine diesel oil costs have lowered as a result of the low oil prices, making smaller vessels such as the 21.8k dwt chemical tankers that ABC Maritime ordered at Triyards viable for use in Europe and the USA, where environmental regulations are in effect. Other markets may also see a resurgence in panamax and LR1 size vessels as cheaper bunker costs make transportation to smaller ports economically feasible.

While there still exists an overcapacity for ships as a whole, we find that specialized vessels will increase in demand. Even though lower fuel costs may incentivize operators to maintain older vessels to service existing demand, specialized vessels with increasing regulatory scrutiny on the cargoes being carried will ensure that a market continues to exist for newbuilds.

Chemical tankers are a promising mean for Triyards to enter into the traditional shipbuilding sphere, which is likely to see a period of growth for specialized vessels. Trends indicate that growth may come from LNG, LPG, chemical and clean product transportation vessels.

Triyards outlook

Given all the above, we see that Triyards is poised to manoeuvre according to the changes in market mix. The Vietnamese shipyards are cost competitive and give Triyards an opportunity to compete with clients, and the expanding profile of vessels, such as the new chemical tankers,  being constructed gives Triyards the ability to diversify away from  historical profile.

The main focus of Triyards is likely to continue being their liftboats and other vessels in the offshore space, such as DP2/3 capable MPSVs. The vessels Triyards builds will register continued demand as they are geared towards conducting inspection, maintenance and repair work. Rig operators are more incentivized to extract value from existing offshore assets, and therefore we anticipate demand for maintenance assets to rise, while investment in new exploration and production assets to grow at a slower pace, if not have an outright fall.

The new types of vessels being constructed at Triyards, such as aluminium fastcraft and chemical tankers require more specialized construction techniques and materials, and the act of constructing these vessels will give Triyards the necessary experience to greater market themselves as a viable entrant in that aspect of the market.

 Our view                                                                               

Our general outlook is that there are many positives Triyards has going for it. A healthy balance sheet, an order book with good visibility, a focus on assets that are currently in demand and a retooling of the yards to service new specializations all contribute to Triyards having a stable growth proposition.

The share price performance of Triyards has been correlated strongly with the price of oil, a relationship that, while historically valid, is increasingly spurious given the diversification of products Triyards is engaged in. Nevertheless, even if we factor in the current negative environment, Triyards is undervalued. Their share price trades at 3.6x PER, compared with its 3-year average of 4.2x PER. Compared to its peers, Triyards has a good price to book ratio, positive earnings and the healthiest balance sheet due to its low net gearing.

Name

MktCap (S$m)

PER (x)

PB (x)

Net gearing (x)

TRIYARDS HOLDING

133.0

3.4

0.5

0.3

SWIBER HOLDINGS

103.4

-

0.1

1.5

MTQ CORP LTD

86.4

-

0.7

0.1

VARD HOLDINGS

371.7

-

0.6

1.9

NAM CHEONG LTD

331.2

11.2

0.8

0.3

Average

205.2

7.3

0.5

0.8

Source: Bloomberg

There still are risks for Triyards, as there are for all shipyards in the current environment. The fluctuations in the oil markets right now have rippled across the entire marine sector, and there are multiple moving parts that are changing the dynamic. Factors include a potential resurgence in exploration and production investment should oil prices recover, increasingly stringent environmental regulation forcing the retirement of old ships and requiring new vessels, and changes in route management as ship operators take advantage of lower fuel costs to greater utilize their fleets. All these changes are happening at this moment, with no clear indication of how things will turn out due to the uncertainties in the global economy. We find Triyards to be adequately positioned right now to take advantage of vagaries in the market, but the success of the company depends on how exactly Triyards will respond to market demands as trends become clearer. 


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