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KS Energy: Latent energy for growth

Summary: We recommend investors to switch from Aqua-Terra Supply Co. Ltd (ATS) to KS Energy (KSE), which has a 55% stake in ATS. ATS? share price closed at S$0.475 yesterday, which implies 5% upside to our fair value of S$0.50. Our fair value for KSE is S$4.18, which still offers a substantial 38% price upside potential. Also, as Mr. Kris Wiluan?s leading SGX-listed vehicle, KSE stands to benefit outright from several of his initiatives in Indonesia and the Middle East. We expect KSE?s net profit to grow 23% YoY to a record S$62.1m in FY07. This is likely to be driven by higher number of rig and related capital equipment refurbishment contracts that are in force in FY07, and our projection for an 89% YoY jump in net profit for ATS in FY07. We reiterate our BUY rating on KSE. (Chong Wee Lee)

Market Pulse: Aqua-Terra & Eucon (4 May 2007)

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Aqua-Terra Supply Co. Ltd: Recharged for acquisition

Summary: Aqua-Terra (ATS) has recently completed its renounceable 1-for-2 rights share issue to raise S$43.9m net proceeds. The implication is that ATS is likely to swing from a 0.8x net gearing position into a net cash position of more than S$10m. We estimate that ATS will have about S$59m by end 2007 as acquisition war chest for expansion of products line and new complementary capabilities, assuming 0.5x net gearing. Hence, we estimate that ATS? growth-by-acquisition strategy has the potential to add about S$12m to its net profit, assuming full year contributions. We are retaining our projection for 89% YoY growth to S$14.6m net profit in FY07 for the moment. Investors in favor of taking a more direct interest in ATS? prospect are now exposed to about 18% price upside potential to our fair value of S$0.50. Maintain BUY. (Chong Wee Lee)