Labroy Marine

Small yard with great ambition

BUY S$2.36

Price Target : 12-month S$ 2.96

Reason for Report : Post-conference Update, contract announcement

Potential Catalyst: More contract wins

? Story: The group plans to further expand its capacity at the existing shipbuilding yard by adding a 15ha site, raising the number of shipbuilding berths from 14 to 17.

? Point: The latest contract secured for an accommodation barge for Ezra worth S$39m, will raise total contract wins this year to S$664m and order book to S$2.23bn. The shipbuilding yard is full for deliveries in 2008, and 60% of its building slots for delivery in 2009 is filled. The expanded capacity, when ready in early 2008, will enable the group to undertake more projects for delivery in 2009, which will sustain its longer term growth into FY09.

? Relevance: Excess capacity for shipbuilding and rigbuilding in 2009/2010, will place the group in a sweet position to secure more orders, and continue to ride on the upturn. Backed by a record order book, we expect EPS CAGR at 42% from 2005-2008. The stock is trading at undemanding P/E of 14.8x(FY07F) and 12.5x(FY08F), among the cheapest offshore plays vs its strong earnings growth and high ROE of 26%. Maintain BUY.Labroy has recently acquired an additional 15 ha piece of land, adjacent to its existing site at Batam which is currently used for shipbuilding. This will raise the total area by 40% to 52ha, and enable the goup to add at least three more building slots to its existing 14 for shipbuilding. Currently, the group has an order book of 35 vessels, of which 13 will be delivered in FY07, 14 in FY08 and 8 in FY09. The yard is fully booked for delivery up to FY08 and more than half of its capacity is booked for delivery in FY09. When the enl arged yard is ready by early 2008, it will enable the group to take on more shipbuilding projects.

More building slots.

Strong cash flow, in net cash position

Standard Drilling has tied up with established partners (UMW and KCA) in the oil & gas field to own and market these four rigs build by Labroy. This testifies to these players? confidence in Labroy?s capability in delivering these jack-ups which will be gainfully employed in the oil field. In addition, the sale of these rigs to a joint venture owned by Standard Drilling and UMW will improve its credit standing, reducing the credit risks for Labroy in payment collection. Net cash grew to S$67m as at 1Q07, due to strong inflow of cash from its rigbuilding and shipbuilding projects, and proceeds from sale of vessels. These more than offset capex of S$23m for the new rigbuilding yard.