STX OSV called for a trading halt early in the morning yesterday, before the equity markets opened. However, the company will resume trading today after announcing on the SGX that Fincantieri completed the acquisition of 50.75% of STX OSV from its parent company at a price of S$1.22 per share.

Macquarie’s STXOSV warrants

Code	Name	Type	Expiry	Exercise Price
R3SW	STXOSV MB eCW130801	Call	01-Aug-13	1.45

On 9 January 2013, Macquarie Equities Research released a research report with an Outperform recommendation and 12-month price target of S$1.82 which is 41.1% above its recent closing price of S$1.29. Below are some excerpts from the report.

Period of consolidation ahead
STX OSV will go through a transformational change in 2013, in MER’s view, given that its parent company recently decided to sell its 50.8% stake to an Italian shipyard. MER believes this is a big positive for the company as there are synergies with the new parent plus STX OSV will now be able to keep some of the annual cash flow and invest it in growing the company.

Growth, the Achilles heel for the company, can be taken care of now: Despite being the No.1 vessel builder in the world in terms of market share, a cash rich balance sheet, 13% free cash flow yield and 25-30% return on equity, investors have often rued the lack of earnings growth in STX OSV. The main reason behind that has been 100% utilization of yards and an inability to increase capacity as its Korean parent had been pulling out all the cash in the form of dividends (reflected in the high 10-12% div yield in the past 2 years). Now, with the change in parent, STX OSV can hopefully keep ~50% of the cash it generates annually and invest it in new projects (new yards in various countries) and grow revenues.

Significant synergies with the new parent: The new parent, a 99.4% state owned shipbuilder in Italy called Fincantieri, is a cash rich company with operations dating back 20 years and yards all over Europe. STX OSV and Fincantieri could have significant synergies in terms of new capacity and new customers.

MER’s numbers are very conservative:MER’s earnings estimates are now 5% and 3% below consensus for 2013 and 2014. MER has not built in any potential growth from the new synergies – in terms of capacity or customers – which MER believes could provide a big upside to both consensus and its numbers.

MER’s action and recommendation
Minority shareholders will reject the S$1.22 offer price: STX OSV is trading at S$1.34, far above the S$1.22 that Fincantieri has offered the company’s Korean parent. This implies that minority shareholders will reject the offer price when a general offer is made in the next 3 months. MER thinks Fincantieri might be happy with keeping its stake to 50.8%.

Negatives priced in; stock at ~7x P/E; MER’s target price implies 10x: MER thinks the stock will start running on fundamentals like its strong balance sheet, cash flow generation and upside from new synergies. Singapore listed peers are trading at 12-15x 2013E price to earnings. Despite the inferior growth that MER is building, the stock deserves to trade at least at 10x, in MER’s view.