On May 19, CH Offshore conducted a rights issue, offering existing shareholders the opportunity to purchase 1,409,785,028 new shares at a discounted price of one cent per share, with a two-for-one ratio.
The rights issue has raised $14 million and boosted CH Offshore’s balance sheet into a net cash position of more than $17 million, accounting for about 55% of its current market cap of $31.5 million.
“This cash will be used to expand their current fleet and take advantage of the higher charter rates seen in today’s market. Although the rights were highly dilutive, it was oversubscribed by 175%, indicating the robust interest in CH Offshore’s shares,” writes Loo.
Notably, the company has been on the Singapore Exchange’s (SGX) watchlist since June 6, 2023, after incurring losses for three consecutive financial years.
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Loo adds that post rights issue, CH Offshore is “extremely undervalued”, as the stock trades at only 0.4 times price-to book ratio (P/B) and 1.6 times enterprise value (EV)/ earnings before interest, taxes, depreciation and amortisation (ebitda), with a net cash position of $17.5 million making up around 55% of its market cap.
Its EV and ebitda represents a discount of 70% and 58% to its peers respectively.
Presently, oil and gas company, Baker Tech, owns and controls 55% of CH Offshore, with CH Offshore remaining “strategically important” to Baker Tech, as it operates some of the vessels built by the group.
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At a market value of “only” $32 million, Loo notes that Baker Tech would “only need to come up” with $14.2 million to take full control of the O&M player.
Loo writes: “With CH Offshore’s current net cash position of $17.5 million, it would make this exercise a self-funding one for Baker Tech at current price.”
Even assuming a 33.3% premium at two cents a share, he adds, CH Offshore’s market cap would be $42 million and Baker Tech would only need to fork out $18.9 million for a 45% share.
On an operational basis, Baker Tech designs and builds vessels as well as off shore oil and gas modules and components, while CH Offshore charters, operates and owns anchor handling tug supply (AHTS) vessels. CH Offshore has also been contracted by Baker Tech to manage its lift-boat, having been paid a management fee.
“With Baker Tech’s robust balance sheet and CH Offshore playing a strategic role in Baker Tech’s operations, it makes financial and strategic sense for Baker Tech to try to take full control of CH Offshore,” writes Loo.
He adds: “Baker Tech could channel its oil and gas and wind farm customers to CH Offshore for marine support services, while CH Offshore can leverage Baker Tech’s manufacturing capabilities for its fleet expansion, potentially at the most competitive pricing available.”
Risks noted by Loo include a downturn in the oil and gas industry, which would affect charter rates and demand for CH Offshore’s AHTS vessels.
Another risk is an increase in the free float of shares. CH Offshore’s latest rights issue has resulted in a 66% increase in free float coming into the market. Investors have subscribed for the rights at one cent, potentially resulting in an overhang to the stock’s share price performance in the short-to medium-term as CH Offshore’s share currently stands at 1.5 cents as at July 18.
Shares in CH Offshore closed flat at 1.8 cents on July 21.
