Icon’s proposed purchase of the rig for RM177m by year-end is a key enabler to turn around its earnings from FY21, says analyst

By NUR HANANI AZMAN / pic credit: iconoffshore.com.my

ICON Offshore Bhd’s move to complete the purchase of the jack-up rig from cash-strapped Perisai Petroleum Teknologi Bhd by the end of financial year 2020 (FY20) is seen as earnings positive as Icon’s offshore support vessel (OSV) operations are close to turning profitable.

Maybank Investment Bank Bhd analyst Liaw Thong Jung, in a report, noted that Icon’s proposed purchase of the rig for US$42 million (RM177 million) by year-end is a key enabler to instantaneously turn around its earnings from FY21.

“We have turned more positive on this exercise (versus three months ago), for now, we expect Icon to secure a charter once the deal is completed. Three months ago, visibility for a contract was low.

“Securing a long-term charter (one-year), at current daily charter rate (DCR) of US$70,000 for this jack-up is a catalyst to this exercise. At the purchase price (US$42 million versus prevailing market’s value of US$100 million-US$140 million for such an asset), we estimate Icon can easily break even at a daily all-in cost of US$40,000,” added Liaw.

Based on the investment bank’s back-of-envelope calculation, imputing with the assumptions of: (i) 80% utilisation level (300 days), (ii) DCR of US$70,000, and (iii) daily all-in cost (operating expenditure, depreciation, interest costs) of US$35,000 to US$40,000, Icon is expected to turn profitable, generating a net profit of US$6 million to US$8 million per annum.

He added that Icon’s OSV business to break even in FY21-FY22 which was previously loss-making at a 50%-55% utilisation level.

Icon should sustain a 62% utilisation, backed by the charter visibility of 23 vessels, of which 15 units are under Petroliam Nasional Bhd’s integrated logistics control tower (ILCT) project, three units on Brunei long-term jobs and five on spot charter. The three-year ILCT contract will end in 2021.

“Expectation is for Icon to secure extensions for these vessels. A higher DCR on an extension basis is a catalyst, which we have discounted for now.

“Putting things into perspective, we expect Icon to register a net profit of RM17 million to RM34 million in FY21 to FY22 compared to a loss of RM4 million to RM9 million previously” said Liaw.

The research bank valued the jack-up based on 0.5 times enterprise value/replacement value, which equates to nine sen per share.

Liaw valued OSV operations at 0.7 time price-to-book value (PBV), which translates into seven sen per share.

The investment bank has raised Icon Offshore to a ‘Buy’, with a higher target price (TP) of 16 sen compared to seven sen previously (39% upside) ahead of the completion of the purchase of the jack-up rig from Perisai by end-FY20.

This deal is a key enabler to instantaneously turning around Icon’s earnings from FY21, boosting the TP by nine sen per share.

“On a combined basis, our sum- of-the-parts-based TP of 16 sen now equates to mean PBV of 1.3 times, on a relative basis,” noted Liaw.