Good sign of vessel financing recovery in OSV (offshore supply vessel) market. These are two large and complex vessels which we had hoped would be part of FY2011 order wins.
That was derailed by the euro crisis which froze the financing markets (recall the Eksportfinans issue) for shipowners, which delayed orders to yards. The final signature on these contracts indicates that financing may be flowing again, hopefully as a sign of more to come.
Eleven per cent of our order win assumption, but only 20 per cent of required H1 2012 wins. STX OSV needs to win another NOK9.4 billion to meet our revenue assumption for the year.
However, we believe that STX OSV needs to win around NOK6 billion within the first half of the year to be able to recognise enough revenue to meet our FY2012F revenue forecast.
Seventy-two per cent of FY2012F revenue secured, up from 67 per cent as of last month, according to our revenue-allocation model for each ship in the order book. Time is running out - there is a lag time of one-to-two months between contract signing and actual revenue recognition. Further, as revenue recognition follows an S-curve, the percentage recognised in earlier quarters is already low. These are the operational issues we see being a downward risk to our revenue forecast.
Sharp revaluation in the last quarter has lifted STX OSV from our deep-value list. When we initiated coverage of STX OSV at $1.13, this was equivalent to 5-6x forward P/E, making it one of the cheapest stocks in our selection.
This is no longer the case. On a forward basis, the stock is currently trading at 9.8x, making it that much riskier for investors. It is also no longer especially cheap within its sector, now trading at 11x.
Fast approaching our market-neutral discounted cash flow value of $2.09, using a beta of 1.4, risk premium 6 per cent, for a total discount rate of 13.7 per cent, nine-year second-stage growth of 7 per cent to 2025F, and terminal growth of 2.5 per cent.
Raise fair value to $2.00, maintain 'buy', maintain caveat: Alongside the sector recovery, we raise our peg from 10x to 11x FY2012F EPS, reaching a fair value of $2.00. Including the 5 per cent dividend yield estimate, there is an upside of 17 per cent to warrant the buy call.
However, we repeat the same caveat as in the last update - much of the revenue is unsecured - failure to win sufficient contracts early enough would cause the company to miss the forecast.
The financing problems are not over in Europe, and high-beta STX OSV stands particularly at risk should the market get the jitters again.
BUY
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