Macquarie Equities Research (MER) has most recently initiated coverage on STX OSV, a Norwegian builder of Offshore Support Vessels (OSV). MER rates the stock Outperform with a 12-month target price of $2.16, offering a 41% upside potential (based on the 30 Aug closing price of $1.53).
Code | Name | Type | Expiry | Exercise Price | Q5PW | STXOSV MB eCW130201 | Call | 01-Feb-13 | 1.65 |
Below are some excerpts of the MER report published on 31 August 2012.Market leader in the high growth high-spec OSV segment
The OSV market is increasingly bifurcated towards high-spec OSV, a segment in which STX OSV is the global market leader. Buyers of high-spec OSVs are mostly Norwegian, and these OSVs are mainly deployed in Northwest Europe and Brazil. With 10 yards in four countries which are the hotbed of OSV activity and long-lasting relationships with all top Norwegian contractors, STX OSV is in a sweet spot. Robust industry dynamics; OSV demand to intensify
While global OSV demand has rebounded from global financial crisis lows (252 OSVs ordered in 2011 and 145 in 1H12 vs 110 in 2009), Ultra deepwater oil exploration has led to an increase in complexity and vessel intensity, which is why MER thinks that the OSV building cycle has legs despite short-term concerns on oversupply. Only 44% of the current 2,973 OSV fleet is high-spec, while the delivery schedule of high- spec Anchor Handling Tug Supply Vessels (AHTS) in particular is very weak (only 79 to be delivered from 2013-15). 150 new and more complex oil rigs are to be supplied to the market over the next three years, which, MER thinks, will require more OSVs and hence the current ratio of 2,973 OSV / 769 oil rigs will expand further. Beneficiary of market bifurcation and increasing intensity
Driven by more demand for high-spec OSVs, MER expects STX OSV's order inflows to improve to NOK12.5bn in 2012 vs NOK11bn in 2011 and further improve to NOK14bn in 2013. Excluding the exceptional returns in 2011 (due to high margin orders from 2008), sustainable margins have improved from 5% in 2009 to 12-14% now. MER expects a steady 5% earnings Compound Annual Growth Rate (CAGR) from 2010-14E. High-return cash rich business model
STX OSV has an exceptionally strong balance sheet (-0.4x net debt / equity) and a robust Free Cash Flow (FCF) generation (13% FCF yield) and high return (ROE ~25% and ROIC ~35%) business model, much superior to listed OSV peers in Singapore and even better than the large-cap rig builders. Shareholders have also benefitted via high dividend yields of 9-10% each in 2011 and 2012, which could be moderated to a 4-5% yield to preserve cash for funding future growth, in MER's view. Valuations ignoring premium positioning plus high returns
MER thinks that STX OSV deserves to trade more in line with the rig builders, given that the listed OSV players in Singapore target the low-end, low-return segment of the market and have much inferior balance sheet and return profiles. STX OSV is currently trading at an approximate 50% discount to Singapore yards and approximately 15% discount on price-earnings ratio compared with listed OSV peers despite much superior market share, balance sheet and return profile.
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