Idea of The Week: Petronas’ licensed panel contractor, Keyfield to issue MYR bonds at IPG of 4.8%

• Investors can consider the 3Y bond which is in line with expected strong demand for OSVs in the next 2 to 3 years. Furthermore, the 15bps uptick for the 5Y bond is not attractive enough for the additional duration investors will have to take on.

Keyfield International Berhad (“Keyfield”) mainly operates in the provision of offshore support vehicles (OSV), supporting the oil and gas (O&G) activities in Malaysia. In April 2024, the group was listed on the Main Market of Bursa Malaysia and currently has a market cap of ~RM1.8 billion.

Keyfield specializes in providing accommodation work boats (AWB) with 13 vessels in its fleet and a total available accommodation capacity of 1,810 passengers. These AWBs provides living quarters for offshore O&G workers, filled with amenities such as medical support facilities, catering, laundry and internet connectivity.

Industry outlook

Keyfield currently focuses on the O&G sector, providing support for O&G activities within Malaysia. Naturally, being involved in the O&G sector, Keyfield is exposed to the cyclicality of the sector with orders mirroring activities within the industry. Nevertheless, the demand for OSV within Malaysia continue to looks strong, and is expected to remain robust at least for the next 2 to 3 years, considering current O&G activities and spending. Looking at Petronas’ expected capex, it is estimating a total RM300 billion capital investment from 2023-2027, a 43% increase compared to the last 5 years.

The current tight supply of Malaysian-flagged OSVs also bodes well for Keyfield, especially with the currently high demand for OSVs. In 2023, to address the shortage in OSVs, Petronas increased the cut-off age for vessels participating in tenders to 20 years, from 15 years previously. In 2Q24, to meet the excess demand, Keyfield is relying on chartering third-party vessels as their existing fleet of vessels are already at a 96.9% utilisation rate.

Keyfield’s competitive advantage

As a player in the O&G sector in Malaysia, Keyfield’s license from Petronas gives it an advantage in receiving invitations to bid and be awarded the Letter of Award (LOA) from Petronas. This also allows them to charter third-party vessels from operators to meet demand from clients when their vessels are fully utilised. Their license was recently renewed for 3 years up to June 2027, allowing them to continue participating as a panel contractor.

In the competitive bidding process, clients typically have certain pre-qualification criteria’s which may include experience in vessels operation, technical capabilities of the vessels and age and condition of the vessels. Keyfield’s fleet remains competitive in both its technical capabilities and age, given the average age of their fleet is 8 years compared to an industry average of 10 years. 

Financial Highlights

Chart 1: Keyfield’s Profitability

Keyfield witnessed a remarkable growth in profitability, largely owing to increased activities in the O&G industry and their continued expansion of their fleet to cater for the increasing demand. Their revenue has grown from RM75.2 million in FY20 to an all time high of RM522 million achieved in just their third quarter of FY24.

Their improving margins are mainly from higher daily charter rates, while fixed costs remained low on the back of higher utilisation with YTD utilisation rate of 88.4% against 81.3% last year. Higher utilisation bodes well for the group as they will be able to reduce cost related to unutilized vessels which includes berthing costs, crew costs and fuel costs. On the other hand, daily charter rates for the group have continued to climb to an average of RM110,000 per day for their own vessels, compared to RM 82,000 per day in the previous year.

Keyfield is expecting to further expand its fleet in the future to 15 vessels, which we believe to benefit Keyfield in improving margins, especially since currently 25% of revenue is derived from third-party charter with lower margins as average charter rates are lower at RM 67,000. Having additional vessels will allow them to meet demands without relying on third-party charters.

Credit Highlights

Table 1: Keyfield credit

Keyfield’s recent IPO where they raised RM188 million have been fully utilised to redeem all of their borrowings, except for existing lease liabilities. Owing to that, they are currently in a net cash position with total debt obligations including lease liabilities of RM36 million against their cash holdings of RM50 million. Projecting for the expected RM250 million issuance, we expect them to continue to maintain their healthy balance sheet with Debt to equity projected to increase to around 40%. Their strong operating cash flow will support their debt servicing with interest coverage ratio of around 14x post issuance.

Key risk

Keyfield is exposed to the cyclical nature of the O&G sector with revenue highly dependent on their number of vessels chartered and days chartered. These factors are largely determined by the market and current O&G activities.

Renewal of Keyfield’s license is also paramount which is expected to end in June 2027. As mentioned, the license will allow Keyfield to participate in tenders from Petronas. Without a license, Keyfield will likely have to rely on being a third-party charterer for licensed operators, reducing their profitability and margins. Nevertheless, we are optimistic with the coming renewal given their operating track record with their licensed obtained since June 2018.

Our Recommendation

RAM has assigned a preliminary rating of AA3 for Keyfield with a stable outlook. The RM250 million issuance will be used to fund their acquisition of new vessels and working capital.

Among the issuances, we prefer the 3Y bond which is in line with the expected demand for OSV to continue for the next 2 to 3 years. Furthermore, there is also the risk of non-renewal of the license set in June 2027 though we do not see a high likelihood of that happening considering their strong operating track record with Petronas as a licensed holder since 2018. Additionally, we do not see the 15bps uptick for the 5Y bond to justify the additional duration investors will have to take on. As such, we would recommend investors to consider Keyfield’s 3Y sukuk at an IPG of 4.5%.

Table 2: Keyfield upcoming bond issuances