Warrants Highlight

STX OSV - Gold, for the price of silver

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).

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.

Singapore Market Wrap

STI Slipped Below 3,000

After two days of unusually quiet trading sessions, the SGX turnover improved slightly yesterday, returning to its $1bn mark. However, the STI fell through the 3,000 level to close at 2,995.90, down 0.5% day-on-day (dod). Losers outnumbered gainers by around 2 to 1.

Other Asian markets were mostly in the red yesterday, with the HSI closing at 19,145.07(-1.5% dod) and the China A50 Index closing at 6,983.32 (-0.6% dod)

STI 3100MBeCW121031 (Q1AW) exercise level 3,100.*
STI 2950MBePW121031 (Q0ZW) exercise level 2,950.*

HSI19400MBeCW121030 (Q7KW) exercise level 19,400.*
HSI19000MBePW121030 (Q7LW) exercise level 19,000.*

CN8500MBeCW121129 (QP3W) exercise level 8,500.*
CN7500MBePW121129 (QP5W) exercise level 7,500.*

Olam weakness continued
Olam (-2.1% dod, $1.845) shares fell for the 3rd day, falling 3.9% over the period. The food commodities supplier fell below its $2.00 level last Monday and has been tending down since.

According to Bloomberg, Olam management commented that the sugar surplus in India will fall by 63% in the next season. This is mainly due to the less than expected rain fall brought by the monsoon this year. The dry weather could reduce local output to 24mn to 25mn tons, compared to 26mn tons last year.

Call warrant OLAM MB eCW130201 (Q4MW) exercise price $2.00.*

OCBC and UOB pared losses on late rally
Both OCBC and UOB fell almost 1% intra-day before a wave of buying came in the afternoon and helped the shares to recover most of their losses. OCBC ended the day 0.1% lower at $9.18, while UOB fell 0.2% to $18.99.

The slowdown in loan growth momentum continued in July. According to the Monetary Authority of Singapore (MAS), total bank lending rose 1.3% in July, compared to 1.7% in June. However, bank lending increased 20% compared to a year earlier

Call warrant OCBC Bk MBeCW130102 (Q7VW) exercise price $9.20.*
Put warrant OCBC Bk MBePW121203 (Q4SW) exercise price $9.00.*

Call warrant UOB MB eCW130103 (MW0W) exercise price $19.397.*
Put warrant UOB MB ePW121102 (Q3ZW) exercise price $19.00.*

Overnight Market Wrap

Unlimited bond purchases from the ECB?

European indices added gains on news of the European Central Bank President, Mario Draghi's proposed bond-purchase plans. Two of the officials who were briefed of the plans said that the purchases involved unlimited buy back of government debt that would be sterilized. Sterilization means that the government will drain money from other parts of the financial system so as to stabilize the money supply.

The plan, which may be called "Monetary Outright Transactions" will focus on government bonds with maturities of up to three years. Later today, the Central Bank will announce at the press conference whether the plan will be given the go ahead. Also, he will be stressing the conditionality of the program which will include ceasing of the bond purchases if it fails to meet the conditions it agrees to when it signs up for aids from Europe's rescue fund.

In the US, Facebook rallied 4.8% after founder Mark Zuckerberg said that he will not sell his holdings for at least a year. The S&P closed at 1403.44, down 0.1% dod.

Overnight Markets

Indices	Last	Change
STI	2995.90	-0.5%
HSI	19145.10	-1.5%
DJIA	13047.50	0.1%
S&P 500	1403.44	-0.1%
Nasdaq	3069.27	-0.2%
China A50	6983.32	-0.6%

Corporate News

Corporate Announcements

Ezion starts issuing S$125mn of perpetual bond at 7.8%

Introduction:

Ex-dividend dates:
Wed 26 Sep: SGX ($0.15)
Tue 6 Nov: Olam ($0.05)