STX OSV is a bargain buy, Macquarie Equities Research (MER) believes and states reasons as to why it has an Outperform rating on STX OSV with a 12-month price target of $1.82, 48.6% above the stock’s closing price of $1.225 yesterday.

With the share price overhang removed after the change in major shareholder from STX Corp to Fincantieri (55.63%), and the market underestimating the potential of recovery in vessel orders and margins, MER believes the stock is a bargain buy at 7x 2014E P/E, at a large 15–45% discount to Asian yards.

Catalysts

Improving industry dynamics to drive strong order growth. Driven by high number of rig deliveries from 2013-15E in addition to lack of high-spec AHTS supply over next 2 years, MER thinks overall OSV demand will bounce back very strongly from 2H12. This will lead to a 15% jump in orders for STX OSV in 2013 and a further 15% and 10% in 2014 and 2015, in MER’s view.

More orders=Higher yard Utilization=Better margins from 2014. As orders improve in 2013 and Brazil yard issues are resolved, MER believes margins will improve from 11.4% in 2013 to 11.8% in 2014 and 12.0% in 2015.

Synergies with Fincantieri. Fincantieri is a very experienced (200 years), large company (11 yards with 10,000 employees) with a robust balance sheet (€480m net cash). With this kind of backing, MER believes STX OSV will be in a much stronger position to grow and have access to large subsea customers.

Combination of 4–6% div yield + 10–20% growth. Given no more pressure from the parent to pay heavy dividends, MER thinks STX OSV will reduce div payout to 30–40% and use rest of the FCF to grow the company through expansion.

Risks

Additional costs in Brazil yards. The existing yard in Brazil is witnessing high staff turnover, thus dragging margins. In addition, there could be start-up costs at the 2nd Brazil yard which will start operations from 2H13. MER is thus building lower EBITDA margins of 11.4% for 2013 (from 12.6% earlier) and expect improvement to 11.8% in 2014 once these issues are resolved.

MER’s action and recommendation
STX OSV is currently available at 7x P/E due to distress sale by ex-parent; 9-11x is the correct multiple: Listed OSV players in Singapore with inferior return and balance sheet profile are trading at 15-45% unjustified premium to STX OSV. Positive news on orders, margins, synergies from new parent, higher div yield and new avenues for growth will drive the re-rating from 2H13 in MER’s view.
 

MER is thus keeping its ‘Outperform’ rating on the stock with a 12-month target price of $1.82.

Source: Macquarie Research - 9 Apr 2013