KS Energy’s FY08 net profit of S$51.9m (-30% y-o-y) was slightly below our expectations, mainly due to higher than expected operating expenses and lower contribution from its JV. While we have adjusted our FY09/10 earnings forecasts upwards on the back of lower interest expense, our Fully Valued rating on KSE remains, given its relatively rich valuation. Our TP has been adjusted slightly to S$0.49.

FY08 results slightly below. KS Energy (KSE) posted FY08 headline net profit of S$51.9m (-30% y-o-y) on revenue of S$611.0m (+52% y-o-y). The drilling and capital equipment business was the main topline driver, on the back of full year contribution from AOS (vs 7 months in FY07), charter income from a new jackup rig, and non-core asset disposals. Gross margins remained stable, but higher operating expenses impacted EBIT margins, which dipped 1.1ppt y-o-y to 12.5%. KSE also posted lower than expected contributions from associates/JVs of S$3.6m (-65% y-o-y). We estimate recurring FY08 net profit to be c. S$42.9m (+11% y-o-y), after excluding disposal gains from available-for-sale equities of S$11.3m. KSE also declared a final dividend of 1.8 Scts per share, bringing total DPS to 5.75 Scts for FY08, representing a yield of c. 8%.

Gearing reduced. The group’s net gearing has been reduced to 0.76x, vs 1.4x a year ago, following the successful rights issue during the year and the reduction in debt over the last quarter. This has led us to adjust our FY09 and FY10 earnings forecasts upwards by 9-14% as interest expense going forward will be reduced.

Valuation remains rich. Our TP has been raised marginally to S$0.49 (prev S$0.46) on an adjusted FY09 net profit forecast for KSE, and is based on 3x recurring blended FY08/09 PE for its distribution business and 4x for its drilling services business. We maintain our Fully Valued call as the counter remains pricey relative to its peers, while fleet expansion opportunities continue to be limited, in our view.