STX OSV

Kim Eng on 2 Apr 2013

A steal at current price. We initiate coverage on STX OSV (VARD) with a Buy and TP of SGD1.66, pegged to 9x PER on average FY13-15F earnings. As a quality Norwegian shipyard with a niche in high specification offshore support vessels (OSV), VARD deserves to trade at a premium to Asian OSV yards. The conclusion of its sale to Fincantieri Group removes the overhang on share price, while recovering OSV orders will support an earnings turnaround. With a potential capital upside of 35% and FY13F dividend yield of 4.9% (which can rise to 7.3% in FY15F), the stock is a steal.

Depressed by Fincantieri offer. Share price has been de-rated and suppressed due to the lowball offer (SGD1.22/sh) by Fincantieri for STX Group’s 50.75% stake. We suspect that the latter was forced to dispose VARD at such depressed valuations (7.2x FY12 PER/2.0x FY12 P/B) due to financial distress. With the sale concluded, the overhang on share price has been removed and VARD should re-rate positively to at least peer valuation levels.

Setting the stage for outperformance. VARD has been conservative in its order win guidance. We believe that the weakened ordering activity from 2H12 is short-term in nature and foresee a pickup towards 2H13. Offshore activities remain fundamentally strong and the need for a more sophisticated and modern OSV fleet is ever increasing as offshore operations grow more complex. In our opinion, the cautious guidance sets the stage for positive surprises when ordering activities pick up faster and stronger than expected.

Market underestimates strength of recovery. Order win momentum is the key leading indicator to watch. Near-term earnings growth profile masks the real strength and timing of a turnaround given the lagged effect between order win and revenue recognition. We forecast NOK9.7b/12.8b/13.5b in new order wins for FY13F/14F/15F. We expect an 11% dip in FY13F EPS but a 30%/12% surge in FY14F/15F earnings, which puts our earnings forecasts above consensus for FY14F/15F but lower for FY13F. We believe the market has been overly cautious and underestimated the potential strength of a recovery.