Towards Financial Freedom
Kruez - Poised, But Not Priced, For Growth
Kreuz (KRZ) is a fast-growing subsea services provider with very strong margins and highly visible medium-term growth as its capacity is set to more than double by FY16F. Given its very low 6% net gearing and strong cashflow, KRZ is attractively priced at 7.1x FY13F EPS and 19% growth. We initiate coverage with a BUY and SGD1.14 TP, based on 10x blended FY13F/14F EPS, and backed by a SGD2.05 DCF value.
- 30%/20% EBITDA/net margins. KRZ commands very high margins as subsea work is highly specialised. As demand for subsea work - buoyed by sustainable high oil prices - has exceeded the Group's limited capacity, it is now cherry-picking contracts thereby supporting its margins.
- New DSVs can triple FY16F earnings from FY12. Each diving support vessel (DSV) can contribute USD40m annually to KRZ's bottomline (slightly exceeding FY12's profit of USD39.7m). We expect a half-year contribution from one vessel in FY15 and full-year contributions from both units in FY16. We estimate the ROEs of these vessels at 99%, and at only 65% debt funding. Our channel checks indicate that the first DSV will be delivered six months ahead of schedule. Consensus has yet to factor in the positive earnings impact for FY15F.
- Net gearing low even after funding DSVs. KRZ's current net gearing is only 6%. Even after taking on debt to fund the two DSVs, priced at USD114m each, its highest net debt will hit only 20% in FY16F.
- Strong cashflow boosts DCF to SGD2.05 per share. KRZ's FY12 cashflow was strong at USD26.7m. We foresee this figure growing to USD34m-USD50m from FY13F-FY15F. The strong surge in income and cashflow from the two DSVs results in a DCF value of SGD2.05, based on an upward-biased WACC of 10.6%.
- One of few remaining gems. Initiate coverage with BUY. KRZ, which delivered 49% earnings growth in FY12, is on track for 19% growth this year. This is an under-researched growth company trading at a 7.1x forward P/E and 5.1x EV/EBITDA. We see strong potential for KRZ's share price to double within the next three years. Initiate with BUY and SGD1.14 TP, based on a 10x blended FY13F/14F EPS.
Source: OSK
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