Aqua-Terra Supply Co - Procuring a bright future

􀂾 Story: Aqua-Terra (ATS) is an integrated service provider and
procurement specialist to the oil and gas industry, which has one
of the largest regional distributorships for 23 brands, and carries a
range of >160 consumable products. ATS’ consumable products
offering can easily meet more than 20% of its customers’ needs in
an otherwise fragmented industry.
􀂾 Point: We believe ATS’ growth momentum will be augmented
by: 1) its success in securing projects as an integrated service
provider and procurement specialist, 2) more cross-selling
opportunities as it taps into the growing business network of KS
Energy, which is its parent company, and 3) its proven growth-byacquisition
strategy to expand product offerings and regional
customer network.
􀂾 Relevance: We forecast ATS’ net profit to grow 84% y-o-y to a
record S$14.2m in FY07. Its net profit CAGR is expected to be 42%
in our FY07-09 forecast periods. We have a fair value of S$0.84 for
ATS, using 15x FY08 PER. The price upside potential to our fair
value estimate is 66%. As such, we are initiating coverage on ATS
with a BUY rating.
Moving up value chain. ATS’ success as a one-stop procurement specialist
for the oil and gas industry is expected to provide better earnings visibility
by entering into more long-term supply contracts. It has won a S$68m
order to provide integrated procurement and management services from
PRC-based China National Offshore Oil Corp (CNOOC) Oil Base Group Ltd
in early 2007, and a US$14m contract win to procure and supply of marine
equipment & systems in Indonesia in August 2006. These will be
recognised in our FY07-09 forecast periods.
Growth-by-acquisition strategy is workable. This strategy offers ATS the
fastest way to build up its product and networking capabilities to ride on
the booming oil and gas industry. We believe ATS’ growth-by-acquisition
strategy will work as: 1) ATS has successfully made earnings accretive
purchases at low-to-mid single digit forward PER valuation from the pool
of unlisted smaller distributors, and 2) ATS has enabled acquired entities
thrive under its enlarged business umbrella. We estimate the contributions
from entities acquired before 2006 to account for 70-75% of the group’s
PBT in the FY05-06 periods.
Groundworks for growth. We expect ATS’ distribution business to benefit
in the FY07-09 forecast periods through: 1) its initiatives to further
penetrate the Chinese offshore market, 2) the strong rig deliveries in
Singapore and 3) the cross-selling opportunities and business referrals as
part of Mr. Kris Wiluan’s group of companies, which include KS Energy
and Citra Tubindo.
Record earnings year in FY07. We forecast ATS to achieve S$14.2m in
net profit in FY07, representing 84% y-o-y growth. This can be
attributed to the operating leverage effect brought about by ATS’
steady gross profit margins and strong revenue growth. We project ATS’
net profit CAGR to be 42% in our FY07-09 forecast periods.