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DMG & Partners Securities Pte Ltd may have received compensation from the company(s) covered in this report for itscorporate finance or its dealing activities; this report is therefore classified as a non-independent report. Please refer toimportant disclosures at the end of this publication. of this publication

1See important disclosures at the end of this publication

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02 July 2012

SINGAPORE EQUITYInvestment Research

DMG & Partners Research Initiation of coverage Private Circulation Only

OIL & GASJason Saw Koon Khim+65 6232 [email protected]

TECHNICS OIL & GAS BUY Price S$0.93

Terence Wong, CFA+65 6232 [email protected]

Previous N/A

Target S$1.28Oil & Gas

Technics Oil & Gas is a full service integratorof compression systems and processmodules for the global offshore oil and gassector.

Stock Profile/Statistics

Bloomberg Ticker TGH SPSTI 2,879Issued Share Capital (m) 223Market Capitalisation (S$m) 20752 week H | L Price (S$) 1.05 0.795Average Volume (000) 1,332YTD Returns (%) 8.8%Net gearing (%) 28%Altman Z-Score 2.9ROCE/WACC 2.9Beta (x) 0.76Book Value/share (S) 27

Major Shareholders (%)

Ting Yew Sue 14.2%Ting Tiong Ching 6.9%Tay Mian Cheo 5.2%

Share Performance (%)

Month Absolute Relative1m 3.9% 1.2%3m 1.1% 4.9%6m 9.4% 1.5%12m -7.0% 0.8%

6-month Share Price Performance

Under-researched o i l & g as play w ith hig h-yield

We initiate coverage with a Buy rating and TP of S$1.28. Technics is a fullservice integrator of compression systems and process modules for the oiland gas sector. We estimate that the net profit of this small-cap is set to

grow +12.6% CAGR over FY11-14F, driven by strong industry spending, andcapacity expansion in Vietnam. We like Technics for its undemandingvaluation at 9.3x FY12F P/E, attractive yield of 8.6% and earnings growth.

Growing presence in Vietnam with new yard. Technics has two existing yardsin Batam and Singapore with revenue capacity of S$250-300m. The companyhas entered into an agreement to acquire an existing private yard in Vietnam fora maximum consideration of S$10m that will double their revenue capacity. Webelieve the yard will be strategically important to secure more work in Vietnam.

High cash generation; attractive yield sustainable. Technics business modelrequires very limited capex and generates strong operating cash flow. Balancesheet is healthy with a net gearing of 0.28x. In FY10 and FY11, the company paid

10.5S and 12.0S dividends respectively, and management is guiding for 8Sdividend payout for FY12F. This translates into a yield of 8.6%.

Earnings outlook: +12.6% net profit CAGR over FY11-14F. The earningsgrowth is largely driven by strong revenue growth of 24% CAGR over FY11-14Fwhile we expect blended EBITDA margins to stay strong at around 18.0-20.5%.We expect Technics to build a stronger foothold in Vietnam after the purchase ofthe new yard in Vung Tau. The acquisition is expected to complete in Aug 2012.

Valuation: TP of S$1.28 implies 37% upside. Technics valuation at 9.3x FY12P/E with 8.6% yield is appealing. We use a target P/E of 12x on blendedFY12/13F EPS, at the top of its historical range, as we expect P/E valuation toexpand on stronger earnings, higher recognition by the market (stock is under-researched) and spin-off of Norr Offshore Group. Key risks are project execution,

erosion in pricing power for EPCC projects, and delay in award of projects.

FYE 30 Sep (S$m) FY10 FY11 FY12F FY13F FY14F

Turnover 103.6 125.8 165.7 198.8 238.6Reported net profit 16.4 18.7 20.6 23.3 26.7% Chg YoY 165.2 14.2 10.0 13.2 14.7Consensus nm nm 21.4 22.9 24.8EPS (S$ cents) 12.5 9.1 10.0 11.3 13.0DPS (S$ cents) 10.5 12.0 8.0 8.0 9.0Div Yield (%) 11.3 12.9 8.6 8.6 9.7ROE (%) 62.2 49.0 38.1 39.2 39.3ROA (%) 14.6 14.7 13.7 13.8 14.0P/E (x) 7.4 10.2 9.3 8.2 7.2P/B (x) 5.0 3.7 3.4 3.0 2.6

Source: Company data and DMG Estimates

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

0.96

29-Dec 29-Jan 29-Feb 31-Mar 30-Apr 31-May

Share price (S$)

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See important disclosures at the end of this publication

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TABLE OF CONTENT

Investment Summary 3

Company description 4

Experienced management team 7

Order book mostly short term 7

Spin-off of contract engineering subsidiaries 8

Earnings Outlook 9

Valuation: Initiate with BUY with a TP of S$1.28 12

Key risks 12

Financials 13

Appendix 14

Disclaimer 15

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Investment Summary

A full service integrator of compression systems and process modules. Technics isinvolved in the design and fabrication of complex and highly customised compressionsystems and process modules used in the oil and gas industry. Some of the products offeredby Technics are topside package for wellhead platforms, process equipment, waste watertreatment, metering system, subsea structure and compressors. Technics has two existingyards in Batam and Singapore with an annual capacity of S$250-300m.

Experienced management team. The company is co-founded by Robin Ting Yew Sue(Managing Director) and David Tay Mian Cheo (Executive Director) in 1990. Both aresupported by an experienced key management team with an average experience of 19-20years. Robin Ting and his two sons, Ting Tiong Ching and Ting Tiong Chau, own around26% of the company while David Tay owns 5.2% stake in Technics.

New yard space in Vietnam to double capacity. On 16 May 2012, Technics entered into asale and purchase agreement with Vietnam Offshore Fabrication & Engineering (VOFE) for amaximum consideration of S$10m. VOFE owns the biggest fabrication yard in South Vietnamwith a load-out capacity of 10MT/sqm and 5,000 DWT jetty. VOFE is also licensed to importand export oil and gas equipments in Vietnam. We estimate that the new yard will double itsexisting revenue capacity from S$250-300m to S$500-600m. We believe the yard will bestrategically important to secure more oil & gas work in Vietnam.

Catalyst from spin-off of Norr Offshore in Taiwan in 1H2013. Technics is taking steps tolist its engineering units, Norr Systems and Wecom Engineering, on the Taiwan StockExchange. On 8 May 2012, Technics announced that they have consolidated their stakes inNorr Systems and Wecom Engineering into a new subdiary named Norr Offshore. Weunderstand that post the restructuring, Technics will own 52% of Norr Offshore. We believethe listing will allow Technics to unlock the value of its investments in Norr Offshore.

High cash generation; attractive yield sustainable. Technics business model requiresvery limited new capex, and generates strong operating cash flow. Balance sheet is relativelyhealthy with a net gearing of 0.28x. In FY10 and FY11, the company paid 10.5S and 12.0Sdividends respectively, and management is guiding for 8S dividend payout for FY12F. Thistranslates into a yield of 8.6%.

Earnings outlook: +12.6% net profit CAGR over FY11-14F. The earnings growth is largelydriven by strong revenue growth of 24% CAGR over FY11-14F while we expect blendedEBITDA margins to stay strong at around 18.0-20.5%. We expect Technics to build astronger foothold in Vietnam after the purchase of the new yard in Vung Tau. The acquisitionis expected to complete in Aug 2012.

Figure 1: Comparison table for Singapore listed small-cap engineering companies

Source: Bloomberg and DMG estimates

Company Ticker FYE

Mkt cap

(S$m)

Last price

(S$)

EPS

Hist-1

EPS

Pros-1

EPS

Pros-2

P/E

Hist-1

P/E

Pros-1

P/E

Pros-2

ROE

Hist-1

ROE

Pros-1

P/B (x)

Hist-1

P/B (x)

Pros-1

Dyna-Mac Holdings DMHL SP Dec 355.6 0.395 2.8 2.1 2.3 14.3 19.1 17.4 31.5 16.4 2.9 2.7

Rotary Engineering RTRY SP Dec 292.3 0.515 5.5 3.0 4.1 9.4 17.0 12.5 10.8 5.9 1.0 1.0

ASL Marine ASL SP Jun 240.6 0.570 7.6 7.6 10.1 7.5 7.5 5.6 7.1 9.2 0.7 0.7Technics Oil & Gas TGH SP Sep 207.3 0.930 9.1 10.0 11.3 10.2 9.3 8.2 49.0 38.1 3.7 3.4

Baker Technology BTL SP Dec 203.1 0.290 1.1 n/a n/a 26.6 n/a n/a 4.3 nm 1.1 nm

PEC PEC SP Jun 149.3 0.585 12.6 5.6 7.2 4.6 10.5 8.2 16.9 6.8 0.7 0.7

Hiap Seng HSE SP Mar 85.1 0.280 1.4 4.3 n/a 19.9 6.5 n/a 5.7 15.7 1.2 1.0

MTQ Corp MTQ SP Mar 77.2 0.790 14.9 n/a n/a 5.3 n/a n/a 17.7 nm 0.9 nm

12.2 11.7 10.4 17.9 15.3 1.5 1.6

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Company Description

Technics Oil & Gas is a full service integrator of compression systems and process modulesfor the global offshore oil and gas sector. The company was listed on Singapore ExchangeSESDAQ in April 2003 and was upgraded to the Mainboard in January 2008. In Feb 2011,the company raised gross proceeds of S$12.7m through a placement of 13m new shares onTaiwans over the counter (OTC) market, GreTai Securities Market. The company is majorityowned by co-founders, Robin Ting Yew Sue (14.21%) and David Tay Mian Cheo (5.18%).Other substantial shareholders are Ting Tiong Ching (6.86%) and Ting Tiong Chau (4.95%),

the sons of Robin Ting. Management has delivered +23% net profit CAGR over FY02-11.

Figure 2: Net profit track record since listed in April 2003

Source: Company data

Technics operates in three key segments:

Engineering, procurement, construction and commissioning (EPCC): In thissegment, Technics provides solution on a turnkey basis starting from design and all theway up to installation and commissioning of process modules and equipment for the oiland gas industry. Two popular products under this segment are the wellhead satellite

platforms and gas compressor systems. The typical duration of an EPCC project rangesfrom six months to 18 months.

Contract engineering (CE): Non-turnkey basis. Customised service to clients in the formof procurement, fabrication and installation. Project duration can range two weeks to 12months.

Procurement and other services (PS): After sales services such as the supply of spareparts, repair and maintenance.

Figure 3: Key products - Wellhead satellite platform Figure 4: Key products - Compressor package

Source: Company data Source: Company data

3.2

-1.9-3.7

2.0

8.9

3.03.8

6.2

16.4

18.7

-5.0

0.0

5.0

10.0

15.0

20.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Net profit (S$m)

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Figure 5: Revenue breakdown by segments


Few competitors in the gas compressor market. The company started the EPCC of gascompression systems in 2005. In this segment, there is limited competition in the market.Technics is the only authorised packager of gas compression systems for three world leadinggas compressor manufacturers in the Asia Pacific region: Ariel, Cameron and Frick. Otherauthorised packagers in Singapore are GSI (for Ariel), a subsidiary of Malaysia listed WahSeong, and Hiap Seng (for Cameron).

Shipyards located in Singapore, Batam and one upcoming in Vietnam. Technics iscurrently operating from two yards in Loyang Industrial Estate, Singapore and Batam Island,Indonesia. The yards have a combined space of more than 40,000 sqm. The company hasentered into an agreement to purchase a new yard in Vietnam with an area of 50,000 sqm.We estimate that this will nearly double its revenue capacity to S$500-600m per annum. Yardcapacity is not a bottle neck at this stage but the new yard in Vietnam is strategically

important as it enables the company to win more new jobs from oil companies in Vietnam.

Figure 6: Yard details in Singapore and Batam

Description Singapore Batam

New office area (m2) 2,640 n/a

Existing office (m2) 1,610 288

Dormitory area (m2) 1,111 n/a

Covered workshop (m2) 6,445 4,056

Covered store area (m2) 306 900

Blasting and painting area (m2) 246 n/a

Yard open space (m2) 17,856 14,160

Waterfront (m) 135 166

Total plant area (m2) 27,091 23,000

Source: Company data and DMG estimates

2008 2009 2010 2011

PS 5.7 2.8 2.2 6.9

CE 40.9 33.6 36.5 74.0

EPCC 44.2 93.8 64.9 44.9

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Revenue (S$m)EPCC CE PS

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Technics derived most of its revenue from the ASEAN market. The clients are typicallymajor offshore shipyards, FPSO owners and operators, or engineering and processcompanies. In FY11, Singapore only accounted for 15% of its total revenue, and Asean,excluding Singapore, contributed 46% of total revenue. We understand Vietnam is thebiggest market for Technics with 28% of FY11 revenue.

Figure 7: Geographical breakdown of FY11 revenue


Strong customer base. Keppel FELS has been a customer since 1993 while in the past 12months, Technics has added new reputable customers such as Siemens and IHI (Japan).

Figure 8: Customer base


Singapore

S$19.0m15%

Asean,ex-

SingaporeS$57.4m

46%

OthersS$49.3m

39%

*Others comprise of

Australia, China,Germany, Taiwan, U.K.,Oman and U.S.

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Experienced management team

The company is led by its Managing Director (MD), Robin Ting Yew Sue, and its ExecutiveDirector (ED), David Tay Mian Cheo. They are the co-founders of Technics. Both of them aresupported by an experienced management team, with an average 19-20 years of experience.

Figure 9: Key management profile

Management profile Summary

Robin Ting Yew Sue Executive Chairman and Group Managing Director. He is the co-founder of Technics. Responsble for

general management and overall strategic planning and direction of the Group. Has more than 38years experience in design, engineering and production of process modules and integrated systemsfor the oil and gas industry.

David Tay Mian Cheo Executive Director and co-founder of Technics. Responsible for business development, sales andmarketing into new business segments and geographical markets.

Lam May Yih Group Financial Controller. Responsible for the financial, strategic planning, budgeting and corporatematters of the Group. Joined Technics in 2001.

Kiang Long Hoon Managing Director of Wecom Engineering. Has over 30 years experience in cost estimation, projectplanning, sales and marketing in the oil & gas, and shipbuilding industries.

John Lightbody Director of Technics Engineering Australia. He has more than 20 years experience in the oil and gasindustry. He joined Technics in 2006.

Dr Lee Yak Wan General Manager of Petro Process Systems. He has more than 17 years experience in engineering,operations, project management, sales and marketing in many industries.

Lee Tong Hua Senior General Manager for Norr Systems. Has more than 14 years experience in the offshore &

marine industry.

Tan Kia Teck Director, Sales and Marketing of Technics Offshore Engineering. He has more than 17 yearsexperience in cost estimation, sales and marketing in the oil and gas industry. He first joined theGroup in 1994.

Murugaian Mohan Rajkumar Regional Manager of Technics Offshore Engineering. Responsible for the performance of theCompression Division. Has more than 18 years experience in handling rotating and allied equipmentin the oil and gas industry.

Source: Company data (Annual report 2011)

Order book mostly short term

Projects are usually delivered in less than 12 months. As of 11 April 2012, Technics hasan outstanding order book of S$95.5m, which implies 0.6x its revenue in FY11. Technics

contracts are relatively short-term, unlike the order book for major shipyards like Keppel andSembcorp Marine. EPCC contracts are typically between six months to 18 months while thecontract duration for Contract Engineering can range from two weeks to 12 months.

Figure 10: Order book movement


84

125114 110

141

95.5

0

20

40

60

80

100

120

140

160

26.11.07 17.11.08 30.11.09 30.11.10 9.11.11 11.04.12

Order book (S$m)

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Figure 11: Major new orders announced in the past 24 months

Date Customer Project Value

05-Mar-12 not disclosed Turnkey of ship automation and vessels are scheduled to be delivered in FY12. S$10.5m

03-Jan-12 China, Russia Supply super structure for jackup rig and supply and manufacture well testing equipment S$10.1m

11-Oct-11 Southeast Asia Supply five units of Vapor Recovery Compressor Packages S$8.1m

13-Sep-11 Vietsovpetro. Vietnam Topside equipment for Wellhead Satellite Platform GT-1 and MT-1 S$32m

23-Aug-11 Malaysia, FPSO Petrojari Cidade Two CE contracts for structural module and power generation module S$8.5m

18-May-11 China, Russia Manufacture and supply of Well Testing Equipment S$5.6m

07-Mar-11 Russia Equipment for modification of jackup rig Murmanskaya, gas compressor system S$13.1m

01-Mar-11 not disclosed Turnkey vessel construction and service contracts S$22.8m

31-Jan-11 Not disclosed Turnkey vessel construction and service contracts S$25.6m

24-Jan-11 Russia First CE contract from Russia for oil and gas process equipment S$1.7m

3-Jan-11 Middle East EPCC contract for process equipment for Early Production Systems S$23.5m

19-Nov-10 Not disclosed Turnkey vessel construction and service contracts S$25.6m

23-Sep-10 Vietsovpetro. Vietnam Topside equipment for Wellhead Satellite Platform RC-6 and RC-7 S$35m


Proposed spin-off of contract engineering subdiairies in 1H2013

New engineering unit will be listed in Taiwan. On 5 Jan 2012, Technics announced theirintention to spin-off its subsidiaries in the contract engineering segment, Norr Systems andWecom Engineering, on the Gretai Securities Market of Taiwan. Norr Systems provideselectrical propulsion systems, ship-board automation systems and dynamic positioningtraining. Wecom Engineering is involved in the manufacturing and repair of marine andindustrial mechanical parts. Management targets to list the unit in 1H2013.

Completed restructuring of shareholding in Norr Systems and Wecom. On 8 May 2012,Technics announced that they have completed the restructuring of its shareholding in Norrand Wecom Group by consolidating all its interests under a new subsidiary named NorrOffshore Group. We estimate that its shareholding in Norr Offshore Group is around 52%.Post listing, we believe Norr Offshore Group will be deconsolidated from the balance sheet,and this will turn Technics balance sheet back into net cash. We have not taken into accountthe effect of the listing in our earnings model.

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Earnings Outlook

Revenue: We expect Technics to grow its revenue by 32% in FY12 and 20% in FY13 toS$165m and S$199m respectively. We think our revenue forecast is achievable: in 1HFY12,revenue grew +49% YoY to S$85m, which accounted for 52% of our FY12 forecast. Revenuein 2HFY12 will be underpinned by existing orders in hand. As of 11 April 2012, Technics hasan backlog order book of S$95.5m, sufficient to keep workload high up to 1QFY13 (assumingzero new order win).

Figure 12: Revenue breakdown


Margins: Set to stay strong on good pricing environment. We estimate blended EBITDAmargins of 18.0-20.5% in FY12-14F as we believe pricing power remains strong for itsproducts. Management guided that they can maintain its existing margins for the next twoyears. In 1HFY12, Technics achieved EBITDA margin of 20.6% (vs. 23.0% in 1HFY11). Thehighest margin comes from the EPCC segment, where EBITDA margins are around 27%.

Figure 13: EBITDA margins: historical and forecasts

EBITDA margins (%) 2008 2009 2010 2011 2012F 2013F 2014F

Blended Group margins 7.6% 8.5% 25.4% 18.9% 20.5% 19.3% 18.0%

EPCC 7.1% 7.6% 27.9% 26.8% 27.0% 25.0% 23.0%

CE 7.1% 10.5% 20.0% 14.3% 14.3% 13.8% 13.0%

PS 14.2% 15.9% 41.5% 17.0% 17.0% 15.0% 15.0%


Figure 134EBITDA margins projected to hold steady Figure 15: Group EBITDA: Historical and forecasts

Source: Company data and DMG estimates Source: Company data and DMG estimates

0.0

50.0

100.0

150.0

200.0

250.0

300.0

2008 2009 2010 2011 2012F 2013F 2014F

S$mEPCC CE PS

We project revenue tosurge 24% CAGRover FY11-14F

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

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2008 2009 2010 2011 2012F 2013F 2014F

EBITDA margins (%)EPCC CE PS

6.911.1

26.323.8

34.0

38.442.8

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S$mEPCC CE PS

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Net profit: Set to grow 12.6% CAGR over FY11-14F. We estimate 12.6% net profit CAGRover the next three years (FY11-14F) with grow largely driven by higher revenue (+24%revenue CAGR) while margins moderate to more sustainable levels. In 1HFY12, Technicsposted a net profit of S$10.27m (+19% YoY) on higher revenue of S$85.1m (+49% YoY).

Figure 16: Profit and loss statement

FYE 30 Sep (S$m) 2007 2008 2009 2010 2011 2012F 2013F 2014F

Profit and loss

Revenue 60.0 90.8 130.2 103.6 125.8 165.7 198.8 238.6

EPCC 22.7 44.2 93.8 64.9 44.9 82.8 99.4 119.3

CE 27.1 40.9 33.6 36.5 74.0 72.8 89.4 109.3

PS 10.2 5.7 2.8 2.2 6.9 10.0 10.0 10.0

COGS -46.8 -68.4 -101.6 -59.9 -78.9 -104.6 -127.6 -155.9

Gross profit 13.2 22.4 28.6 43.7 46.9 61.0 71.2 82.7

Marketing and distribution -0.7 -0.8 -0.6 -1.8 -2.2 -3.3 -4.0 -4.8

Admin expenses -8.7 -16.0 -18.5 -18.0 -24.2 -28.2 -33.8 -40.6

Net other income/(expenses) 0.1 0.9 -0.3 -2.3 0.2 0.0 0.0 0.0

Forex adjustments -0.5 0.7 -0.6 -2.1 -0.8

Impairment of receivables 0.0 -0.2 -0.1 -0.5 0.3

Impairment of other receivables -0.3 0.0 -0.3 -0.5 0.0

Inventories writedown/writeoff 0.0 0.0 0.0 0.0 -0.4

Gain on disposal of associate or subsidiary 0.0 0.2 0.2 0.0 0.0

Gains on disposal of PPE 0.9 0.0 0.0 0.0 0.1

Others -0.1 0.2 0.6 0.7 0.9

EBITDA 4.5 6.9 11.1 26.3 23.8 34.0 38.4 42.8

Depreciation and amortisation -0.7 -1.3 -1.6 -2.4 -3.4 -4.4 -5.0 -5.5

Operating profit 3.8 5.6 9.5 23.9 20.4 29.6 33.4 37.4

Interest income 0.1 0.0 0.1 0.1 1.9 2.3 1.9 2.1

Interest expense -0.8 -1.5 -2.1 -1.4 -1.3 -1.2 -1.2 -1.2

Share of results of associates 0.0 -0.6 -0.4 -0.9 0.0 0.0 0.0 0.0

Exceptional items 0.1 0.9 -0.3 -2.3 0.2 0.0 0.0 0.0

Profit before tax 3.3 4.4 6.9 19.4 21.3 30.6 34.1 38.2Income tax -0.5 -1.3 -1.5 -4.8 -4.5 -5.2 -5.8 -6.5

Minority interest 0.2 0.7 0.8 1.8 1.9 -4.8 -5.0 -5.0

Net profit 3.0 3.8 6.2 16.4 18.7 20.6 23.3 26.7

Net profit (adjusted for exceptional items) 2.8 2.9 6.4 18.7 18.5 20.6 23.3 26.7

Growth %

Revenue -15.0% 51.3% 43.5% -20.5% 21.4% 31.7% 20.0% 20.0%

EBITDA -63.8% 51.1% 61.4% 137.4% -9.4% 42.6% 13.0% 11.6%

Operating profit -67.9% 46.0% 70.5% 152.3% -14.5% 44.6% 13.0% 11.8%

Profit before tax -70.3% 34.7% 55.8% 182.2% 10.0% 43.4% 11.5% 12.1%

Net profit -66.7% 28.0% 62.3% 165.2% 14.2% 10.0% 13.2% 14.7%

Margins analysis

Gross profit 21.9% 24.6% 22.0% 42.2% 37.3% 36.8% 35.8% 34.7%

% admin to sales -14.4% -17.6% -14.2% -17.4% -19.3% -17.0% -17.0% -17.0%

% marketing to sales -1.2% -0.9% -0.5% -1.7% -1.7% -2.0% -2.0% -2.0%

EBITDA 7.6% 7.6% 8.5% 25.4% 18.9% 20.5% 19.3% 18.0%

Operating profit 6.3% 6.1% 7.3% 23.1% 16.3% 17.8% 16.8% 15.7%

Profit before tax 5.5% 4.9% 5.3% 18.7% 17.0% 18.5% 17.1% 16.0%

Income tax effective rate -16.0% -28.5% -21.6% -24.9% -21.3% -17.0% -17.0% -17.0%

Net profit 5.0% 4.2% 4.7% 15.8% 14.9% 12.4% 11.7% 11.2%


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Figure 17: Cash flow statement

FYE 30 Sep (S$m) 2007 2008 2009 2010 2011 2012F 2013F 2014F

Profit before tax 2.8 4.4 6.9 19.4 21.3 30.6 34.1 38.2

Depreciation 0.7 1.3 1.6 2.4 3.4 4.4 5.0 5.5

Interest income -0.1 0.0 -0.1 -0.1 -1.9 -2.3 -1.9 -2.1

Interest expense 0.8 1.5 2.1 1.4 1.3 1.2 1.2 1.2

Share of results of associates 0.0 0.6 0.4 0.9 0.0 0.0 0.0 0.0

Other non-cash -0.3 -0.3 0.8 1.5 0.0 0.0 0.0 0.0

Operating profit before working cap chgs 3.8 7.5 11.7 25.5 24.1 34.0 38.4 42.8

Working capital changes -3.3 -14.1 2.8 21.6 -30.9 4.5 -1.4 -1.6

Income tax -1.7 -0.7 -1.5 -1.5 -3.6 -5.2 -5.8 -6.5

Net cash flow from operating activities -1.2 -7.3 12.9 45.5 -10.4 33.3 31.2 34.7

Capex -3.3 -13.2 -4.3 -11.4 -6.2 -10.0 -10.0 -10.0

Disposal of PPE 2.5 0.0 0.0 0.0 0.3 0.0 0.0 0.0

Investments 0.8 -0.7 0.2 -1.3 -0.1 -7.0 0.0 0.0

Others 0.0 0.0 0.0 0.0 -14.5 0.0 0.0 0.0

Cash flow from investing 0.1 -13.9 -4.1 -12.7 -20.5 -17.0 -10.0 -10.0

Issuance of shares/warrants 0.0 6.8 0.0 0.0 41.1 0.0 0.0 0.0

Borrowings 5.1 32.2 -12.4 -1.7 10.8 0.0 0.0 0.0

Dividends to shareholders -4.3 -2.1 -5.3 0.0 -31.8 -16.5 -16.5 -16.5

Others 0.8 0.0 -0.2 -11.5 -6.3 0.0 0.0 0.0

Interest received 0.1 0.0 0.1 0.1 1.6 2.3 1.9 2.1

Interest paid -0.8 -1.5 -2.1 -1.4 -1.3 -1.2 -1.2 -1.2

Cash flow from financing 1.0 35.4 -19.9 -14.5 14.1 -15.5 -15.8 -15.6

Net changes in cash and equivalent -0.2 14.2 -11.1 18.3 -16.8 0.8 5.4 9.1

Net effect of exchange rate changes -0.1 0.4 0.9 -1.3 -0.9

Cash at start 4.9 4.6 19.2 9.0 26.1 8.4 9.2 14.7

Cash at end 4.6 19.2 9.0 26.1 8.4 9.2 14.7 23.7


Figure 18: Strong ROE Figure 19: Strong ROA

Source: Company data and DMG estimates Source: Company data and DMG estimates

22.1

57.0

15.3 16.422.2

62.2

49.0

38.1 39.2 39.3

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

%

9.8

26.6

6.45.3 5.9

14.6 14.7 13.7 13.8 14.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

%

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Figure 20: Dividend per share and payout ratio


Valuation: Initiate with BUY with a TP of S$1.28

TP of S$1.28 based on 12x blended FY12/13F EPS. We think Technics valuation isappealing at 9.3x FY12F P/E and 8.2x FY13F P/E. The stock also offers an attractive yield of8.6%. In the past three years, the stock traded at a low of 4.0x forward P/E and a high of11.7x forward P/E. We value Technics at S$1.28 based on 12x blended FY12/13F EPS aswe expect P/E valuation to expand on the back of stronger earnings expansion, and catalystsfrom the spin-off of its subsidiary, Norr Offshore Group, on the Taiwan Stock Exchange. OurTP implies 37% upside from its last closing price.

Figure 21: 12-mth fwd P/E since Oct 2005 Figure 22: 12-mth fwd P/E in the last three years

Source: Bloomberg and DMG estimates Source: Bloomberg and DMG estimates

Key risks

Project execution risk such as incorrect estimation of costs, cost overrun and failure todeliver project on time.

Erosion in pricing power for EPCC projects. Currently, the company is one of the fewauthorised packagers of gas compressor systems for Ariel and Cameron in the AsiaPacific region. Existing pricing power may not be maintained if new competitors emerge.

Delay in award of new projects. Clients may choose to delay the award of projects dueto uncertain market conditions and this will have adverse impact on resource allocation in

the yard.

0.0200.015

0.0200.028

0.105

0.120

0.080 0.0800.090

0

20

40

60

80

100

120

140

0.000

0.020

0.040

0.060

0.080

0.100

0.120

0.140

2006 2007 2008 2009 2010 2011 2012F 2013F 2014F

DPS (S$)%

Dividend per share (LHS) Dividend payout ratio (RHS)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11

Forward P/E band

Mean

+1SD

+2SD

-1SD

-2SD

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

Forward P/E band

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FINANCIAL TABLES

FYE 30 Sep (S$m) FY10 FY11 FY12F FY13F FY14F

Income statement

Revenue 103.6 125.8 165.7 198.8 238.6

Expenses (except D&A) -77.3 -102.0 -131.7 -160.4 -195.7EBITDA 26.3 23.8 34.0 38.4 42.8

Depreciation and amortisation -2.4 -3.4 -4.4 -5.0 -5.5EBIT 23.9 20.4 29.6 33.4 37.4

Interest income 0.1 1.9 2.3 1.9 2.1Interest expense -1.4 -1.3 -1.2 -1.2 -1.2

Share of results of associates/JVs -0.9 0.0 0.0 0.0 0.0Exceptional items -2.3 0.2 0.0 0.0 0.0Profit before tax 19.4 21.3 30.6 34.1 38.2

Income tax -4.8 -4.5 -5.2 -5.8 -6.5Minority interest 1.8 1.9 -4.8 -5.0 -5.0Net profit (reported) 16.4 18.7 20.6 23.3 26.7Net profit (pre-exceptional/core) 18.7 18.5 20.6 23.3 26.7

Balance Sheet

Total Assets 112.0 141.9 159.7 178.8 202.8

Fixed assets 31.4 34.1 39.7 44.7 49.3Other long-term assets 0.0 12.1 12.1 12.1 12.1Inventory 9.3 8.7 9.1 10.9 13.1Receivables 13.1 30.0 34.0 40.9 49.0Other short-term assets 13.0 36.2 43.2 43.2 43.2Cash and short term investment 45.3 20.8 21.6 27.0 36.1Total Liabilities 88.5 92.7 101.7 108.9 117.6

ST debt 30.4 36.9 33.1 33.1 33.1Payables 18.9 27.3 36.3 43.6 52.3Other short-term liabilities 33.0 22.7 22.7 22.7 22.7LT debt 5.1 4.5 8.3 8.3 8.3Other long-term liabilities 1.0 1.2 1.2 1.2 1.2Total Equity 23.6 49.2 58.1 69.9 85.1

Shareholders' funds 24.5 51.9 56.0 62.9 73.1Minorities -0.9 -2.8 2.0 7.0 12.0

Cash Flow Statement

Operating cashflow 45.5 -10.4 33.3 31.2 34.7

Capex & acquisitions -11.4 -5.9 -10.0 -10.0 -10.0Free cashflow 34.1 -16.3 23.3 21.2 24.7

Other inv cashflow -1.3 -14.6 -7.0 0.0 0.0New borrowings -1.7 10.8 0.0 0.0 0.0Share issuance 0.0 41.1 0.0 0.0 0.0Dividends paid 0.0 -31.8 -16.5 -16.5 -16.5Other fin cashflow -12.8 -5.9 1.0 0.7 0.8Net cashflow 18.3 -16.8 0.8 5.4 9.1

YoY Growth

Revenue (%) -20% 21% 32% 20% 20%Operating profit (%) 152% -14% 45% 13% 12%Profit before tax (%) 182% 10% 43% 11% 12%Net profit (%) 165% 14% 10% 13% 15%

Margins

EBITDA (%) 25.4% 18.9% 20.5% 19.3% 18.0%EBIT (%) 23.1% 16.3% 17.8% 16.8% 15.7%PBT (%) 18.7% 17.0% 18.5% 17.1% 16.0%

Per Share Data

Outstanding shares 131 206 206 206 206EPS (S cents) 12.5 9.1 10.0 11.3 13.0DPS (S cents) 10.5 12.0 8.0 8.0 9.0BVPS (S cents) 18.7 25.2 27.2 30.5 35.5ROE (%) 62.2 49.0 38.1 39.2 39.3ROA (%) 14.6 14.7 13.7 13.8 14.0Net debt-to-total equity (%) Net cash 42.0 34.1 20.6 6.3P/E (DMG) 7.4 10.2 9.3 8.2 7.2P/B (x) 5.0 3.7 3.4 3.0 2.6Dividend yield (%) 11.3 12.9 8.6 8.6 9.7


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APPENDIX

Figure 23: Company structure

Source: Company data (Annual Report 2011)* Does not reflect the recent restructuring of the shareholding in Norr Systems and Wecom Engineering

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DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage

DISCLAIMERS

This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specificinvestment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluateparticular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation toany securities or investment instruments mentioned in this report.

The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warrantynor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in t his report are subject tochange without notice.

This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities.

DMG & Partners Research Pte Ltd is a wholly owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK InvestmentBank Berhad and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Memberof the Singapore Exchange Securities Trading Limited.

DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in thesecurities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporationswhose securities are covered in the report.

As of the day before 2 July 2012, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do nothave proprietary positions in the subject companies, except for:

a) Nilb) Nil

As of the day before 2 July 2012, none of the analysts who covered the stock in this report has an interest in the subject companies covered in thisreport, except for:

Analyst Companya) Nilb) Nil

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