Linus Loo, analyst at Lim and Tan Securities, has identified offshore and marine player (O& M) CH Offshore to be an &ldquo ideal privitisation candidate&rdquo in a non-rated report dated July 18.

 

The company owns and charters six 12,240 brake horsepower (BHP) vessels that are equipped for heavy offshore work in deep sea areas. These vessels operate across the globe from Mexico, Africa, India to Southeast Asia, supporting oil and gas majors and oil field contractors.

 

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&rsquo 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.

 

&ldquo This cash will be used to expand their current fleet and take advantage of the higher charter rates seen in today&rsquo s market. Although the rights were highly dilutive, it was oversubscribed by 175%, indicating the robust interest in CH Offshore&rsquo s shares,&rdquo writes Loo.

 

Notably, the company has been on the Singapore Exchange&rsquo s (SGX) watchlist since June 6, 2023, after incurring losses for three consecutive financial years.

 

Loo adds that post rights issue, CH Offshore is &ldquo extremely undervalued&rdquo , 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 &ldquo strategically important&rdquo to Baker Tech, as it operates some of the vessels built by the group.

 

At a market value of &ldquo only&rdquo $32 million, Loo notes that Baker Tech would &ldquo only need to come up&rdquo with $14.2 million to take full control of the O& M player.

 

Loo writes: &ldquo With CH Offshore&rsquo s current net cash position of $17.5 million, it would make this exercise a self-funding one for Baker Tech at current price.&rdquo

 

Even assuming a 33.3% premium at two cents a share, he adds, CH Offshore&rsquo 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.

 

&ldquo With Baker Tech&rsquo s robust balance sheet and CH Offshore playing a strategic role in Baker Tech&rsquo s operations, it makes financial and strategic sense for Baker Tech to try to take full control of CH Offshore,&rdquo writes Loo.

 

He adds: &ldquo 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&rsquo s manufacturing capabilities for its fleet expansion, potentially at the most competitive pricing available.&rdquo

 

Risks noted by Loo include a downturn in the oil and gas industry, which would affect charter rates and demand for CH Offshore&rsquo s AHTS vessels.

 

Another risk is an increase in the free float of shares. CH Offshore&rsquo 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&rsquo s share price performance in the short-to medium-term as CH Offshore&rsquo s share currently stands at 1.5 cents as at July 18.

 

This Company&rsquo s Rights Issue Oversubscribed: Free Float Surges from 11% to 45% as Investors Pounce on Deep Discount

CH Offshore Ltd., established in 1976 and headquartered in Singapore, owns and charters offshore support vessels (OSVs) for the oil, gas, and renewables industries. Its current fleet of six vessels&mdash comprising anchor handling tugs, platform supply vessels, work boats, and lift boats&mdash serves clients across Southeast Asia, and beyond. After several challenging years marked by losses since FY2020, CH Offshore achieved a turnaround in 2024, posting a profit of US$1.3 million and an EBITDA of nearly US$7 million. This recovery was driven by improved operational efficiency, among other factors, and particularly a resurgence in charter rates due to tight vessel supply and robust demand from offshore energy projects.   US$&rsquo 000 FY24 FY23 FY22 FY21 Revenue 26,229 24,094 18,599 15,520 Gross profit/(loss) after direct depreciation 6,160 (717) 2,304 (634) Profit/(loss) after tax 1,317 (8,249) (3,331) (4,954) Gross profit/(loss) margin 23.5% -3.0% 12.4% -4.1%   In Feb 2025, CH Offshore launched a 2-for-1 rights issue, offering new shares at S$0.01 each&mdash a steep discount to the pre-announcement price of  S$0.046. Results of the issue  released  on 18 June showed it was heavily oversubscribed, with only 115 million shares left unsubscribed, while excess demand reached 1.1 billion shares. As a result, the company&rsquo s free float rose from 11% to  45%, significantly improving liquidity and broadening the shareholder base. The remaining 55% is owned by Singapore-listed Baker Technology (whose $111 million market cap, by the way, stands way below its cash level, which is a story for another time).

 

 

Post-Issue Financial Position

 

• Market Valuation:
  • Current share price of  $0.015  values the company at  $31.5 million  (2.1 billion shares × $0.015).
     
  • Net cash  stands at  $16 million, representing half the market cap.
     
• Book Value Analysis:
  • New book value =  $0.032 per share, placing the current price at a  53% discount.
     
  • Historically, shares traded at a  40% discount  to book value pre-rights ($0.046 vs. $0.077 book value).
     
• Free Float Impact:
  • Public float surged from  11% to 45%  post-rights, enhancing liquidity.
     

Market Dynamics and Outlook   The capital raise generated  $14 million  for the company, yet market cap declined from  $32.3 million  (pre-rights) to  $31.5 million  despite the cash injection. This disparity stems from: Overhang pressure: Investors who secured rights shares at 1 cent may sell for quick profits (current price:  $0.015= 50% gain).   Valuation disconnect: The stock trades at a steeper discount to book value (-53% approximately) than the historical -40%, suggesting potential upside to  $0.02  (40% discount to $0.032 book value).   The rights issue strengthens CH Offshore' s ability to seize opportunities to enhance its vessel fleet:   " Strengthening the balance sheet now gives the Company flexibility to move quickly when suitable, younger second-hand vessels become available to place orders for new builds or initiate specification upgrades when pricing and design clarity improve and provide the financial comfort that sellers, shipyards and financiers typically require. " Management expects charter rates to  improve  going forward. Historically, there has been minimal new vessel construction over the past 10 years, resulting in a limited supply of offshore support vessels. This supply constraint, coupled with sustained demand in the offshore oil and gas sector and emerging opportunities in renewables, supports a positive outlook for charter rates." -- CH Offshore (source:  EGM minutes) Long-term value hinges on whether the market reappraises the stock toward its historical discount-to-book norm and whether CH Offshore delivers improved results that ride on the booming charter rates. For more on the fundamentals, see our recent story:  CH OFFSHORE: Cash-Rich Comeback in Booming OSV Sector