www.dbsvickers.com
Refer to important disclosures at the end of this report
ed: JS / sa: YM
Company Focus
STX OSV Holdings Limited
Table of Contents
Analysts
SWOT Analysis 4
Company Background 5
Segmental Analysis 21
Key Risks 23
Valuation 29
Appendix 30
Page 2
Company Focus
STX OSV Holdings Limited
Investment summary
Leading builder of complex and customised OSVs. STX OSV is ordered globally, vs. 73 a year before. This has been led by
one of the major global shipbuilders specialising in the the larger capacity PSVs (>3,000 DWT), which accounted for
construction of complex and highly customised offshore 57% of 2010’s orders. However, orders for AHTS have been
support vessels (OSVs) such as anchor handling tug supply slow, due to overbuilding over 2005-10.
(AHTS) vessels, platform supply vessels (PSV), advanced
offshore subsea construction vessels (OSCV), as well as other Orders to continue to make a comeback, underpinned by :
specialized vessels. It is the largest builder of AHTS of 1) greater E&P spending as oil companies look to increase
>20,000 BHP and PSVs of >4,500 DWT, with a global market production in an high oil price environment; 2) asset
share of 30.8% and 18.0% respectively. It has delivered >200 replacement cycle as the highly aged global OSV fleet will
offshore and specialized vessels since 2000. have difficulty meeting the increasingly stringent safety and
environmental standards and the tougher offshore drilling
One of few high-end OSV yards with in-house vessel design and production conditions; 3) deeper waters and harsher
capabilities. STX OSV is one of the few high-end OSV environments will require equipment able to deliver higher
shipbuilders with its own in-house vessel design and performance, with larger tonnage and cost efficient OSVs.
engineering capabilities. It is ranked 1st and 2nd for the
number of PSVs >4,500 DWT and AHTS >20,000 BHP being Expecting order wins to pick up over 2H 2011 to 2013. We
built based on its in-house designs. As such, its orders are expect orders to pick up in FY11, with YTD order wins of c.
typically secured by invitation of customers than competitive NOK2.4bn vs. our full year order wins assumption of
bidding, ensuring a certain degree of pricing power. NOK13bn. Current orderbook is estimated to be NOK19.4bn
(NOK16.3bn if exclude the 8 Transpetro carriers, awaiting
Strategically located yards can deliver 23-25 vessels a year. funding approval), underpinning earnings visibility up to
The group has 9 strategically located yards in operation: 5 in FY16. For FY12/13, we have assumed order wins of
Norway, 2 in Romania and 1 each in Brazil and Vietnam, NOK12bn/NOK15bn.
enabling it to maintain its competitive advantage in
innovation, cost efficiency, manufacturing flexibility, while STX OSV to deliver steady FY10-12 EPS CAGR of 15%.
leveraging off its close proximity to key offshore oil and gas Despite full yard utilisation till late 2012/early 2013, we
markets to tap on regional opportunities and expand its expect STX OSV to post recurring earnings CAGR of 15%
customer base. Depending on the mix of vessel types and over FY10-12, vs. revenue CAGR of 8%. This will be largely
vessel sizes in the orderbook, it is able to deliver between 23 driven by improved project execution and efficiency gains,
and 25 OSVs a year. While there are plans to expand the resulting in superior EBITDA margins of >10% over FY11F-
launch facility in the Tulcea yard in Romania, this initiative 12F vs. FY07-10’s average of 4%.
will only commence once there is a project in place which
demands such infrastructure support. Initiate coverage with BUY; upside of 55%. At 7x FY11 PE,
STX OSV is trading at an unwarranted discount to peers,
Reinforcing Brazil market share with second yard. In with valuations supported by steady earnings growth and an
anticipation of the robust local Brazilian demand for OSVs, attractive dividend yield of 4.2-4.5%. We initiate coverage
STX OSV is developing a second shipyard in Pernambuco, on STX OSV with a BUY recommendation. Our TP of S$1.86
Brazil. This second yard is expected to reinforce the group’s is based on 11x blended recurring FY11/12 PE, derived from
commanding position in Brazil where it has a market share of the average historical forward PE among the large (13.3x)
45%. The new yard is scheduled to commence operations in and small/mid cap (8.2x) Singapore listed yards.
mid-2012 with the construction of a series of 8 LPG carriers
for Transpetro, for delivery over 2014-2016. We expect it to Potential catalysts, risks. We view potential near term
be able to take on additional 3rd party orders by mid 2014. catalysts from the approval of financing on the 8 Transpetro
Once in full operation, it will be able to deliver 4-5 larger LPG carriers, which will make the contracts effective, as well
vessels a year. as more OSV order wins. Risks include cost overruns,
increased competition, and share overhang concerns on
Orders have returned… led by PSVs. The PSV market has potential placement by parent company of up to a 19%
experienced a rebound in orders in 2010, with 91 units stake in the company.
Page 3
Company Focus
STX OSV Holdings Limited
SWOT Analysis
Strengths Weakness
Focus on complex and highly customised OSVs. STX OSV focuses on Development of prototype vessels involves risk. Some customers
the design and construction of complex and highly customised OSVs, require the group to build prototype vessels using latest design and
requiring a high degree of technology and experienced workforce. technology and explore new concepts. However, such new designs
This level of technological capability differentiates them from many may not perform as expected, and could encounter unexpected
yards that compete in the more saturated small/mid-sized run-of-the- problems in design, engineering, production or after delivery
mill type OSV market. phases.
One of few high-end OSV yards with in-house vessel design Back-end loaded payment terms implies heavy reliance on external
capabilities. STX OSV is one of the few high-end OSV shipbuilders sources to fund working capital. The payment terms STX OSV
with its own in-house vessel design and engineering capabilities. typically extends to its customers is back-end loaded, with 20%
Orders are typically secured by invitation of customers than upfront and the remaining 80% upon delivery. This implies STX
competitive bidding, ensuring a certain degree of pricing power for OSV’s access to ready financing is crucial to the business to fund
the group. working capital. This is met via construction loans from banks. As
such, we believe a potential deterioration of the credit markets is a
Market leader for large PSVs and AHTS.STX OSV is currently the risk to the group’s access to funding as well as its customers’ ability
largest builder of AHTS of >20,000 BHP and PSVs of >4,500 DWT, to pay for the vessels. However, we note that through the recent
with a global market share of 30.8% and 18.0% respectively. It also global financial crisis, STX OSV did not experience issues on
st nd
ranks highly for vessel designs, being 1 and 2 in terms of market accessibility to funds or any customer defaults or cancellations.
share for PSVs >4,500 DWT and AHTS >20,000 BHP being built based
on its in-house designs. Compensation from third party design contracts may not
adequately cover losses. STX OSV occasionally uses third party
Strong track record; with many industry milestones. Delivered >200 vessel designs. In the event of a delay in vessel delivery due to
offshore and specialized vessels since 2000, and has achieved several design flaws, the design purchase contract typically provides for
industry milestones (see appendix). compensation by way of liquidated damages. However, the
contracts typically include a cap on the compensation amount, and
Strategic location of yards. STX OSV currently has 9 strategically the compensation available under the contracts may be less than
located yards in operation: 5 in Norway, 2 in Romania and 1 each in the actual losses suffered by the group.
Brazil and Vietnam. This enables the group to maintain its competitive
advantage in innovation, cost efficiency, manufacturing flexibility,
while leveraging off its close proximity to key offshore oil and gas
markets to tap on regional opportunities and expand its customer
base.
Opportunities Threats
More investments into exploration and production. With oil prices and Competition from yards in lower cost countries. There have been
input costs at levels which make most projects economically viable, oil many new entrants to the OSV shipbuilding industry in recent years,
companies are also increasing focus on growing production. Industry especially from more cost efficient countries such as Korea and
consultants Energyfiles/ Douglas Westwood estimates that over the China. This could result in an increased competition for a limited
next 5 years, world offshore oil and gas production spending would number of new orders, adversely impacting pricing power, or
amount to US$874bn. This willingness of oil companies to invest is significantly push down prices for newbuilds.
demonstrated by higher E&P capex budgets in 2011.
Overly high oil prices may do more harm than good. Global
Asset replacement cycle on highly aged OSV fleet. The global AHTS offshore oil and gas capex is generally positively correlated with oil
and PSV fleets are highly aged, averaging 16.9 years and 17.5 years prices. This positive correlation is also observed with respect to the
respectively. This implies an increasing technical demand/supply Singapore-listed yards’ annual order intake and oil prices since
mismatch, and will face increasing difficulties in meeting the 2004. A caveat to note, however, is a too sharp and sustained spike
increasingly stringent safety and environmental standards, as well as in oil prices beyond US$100/bbl can cause unwanted inflationary
the tougher offshore drilling and production conditions. Assuming pressures, posing significant threat to the economy.
vessels >30 years are removed from the market, we estimate that
replacement demand to be 496 for AHTS and 479 for PSVs, or around Risk of cost overruns on fixed price contracts is higher in a rising
23% of the existing global fleet. cost environment. Most of STX OSV’s shipbuilding projects are fixed
price contracts, except for a few that include price adjustment
Deeper waters, harsher environment E&P activities to drive demand provisions in the event of steel price increases. STX OSV typically
for high spec OSVs. As offshore activities move into deeper waters negotiates the price of major equipment and supplies, and will
and harsher environments, the installations have also become more factor in all such costs into the contract price on contract signing.
sophisticated. This has resulted in an evolution in OSV design with a Labour and funding costs are two major cost drivers that are not
greater emphasis on research and development, equipment able to hedged, and are priced into the contract based on best estimates
deliver higher performance, and OSVs with larger tonnage and cost for inflation.
effectiveness.
Page 4
Company Focus
STX OSV Holdings Limited
Company Background
Leading builder of complex and customised OSVs. STX OSV is in-house and the design has gained references and maturity
one of the major global shipbuilders specialising in the in the market. Such designs are typically sold as bundled
construction of complex and highly customised offshore packages with related main equipment and electrical
support vessels (OSVs) such as anchor handling tug supply solutions, allowing it to derive a small but growing proportion
(AHTS) vessels, platform supply vessels (PSV), advanced of revenue, booked under Trading revenue. This accounted
offshore subsea construction vessels (OSCV), as well as other for 1% of sales in FY07 and up to 3% in FY09. Note that
specialized vessels. from FY10 onwards, STX OSV does not disclose revenue
breakdown.
The Offshore & Specialised Vessels division of STX Europe.
Headquartered in Alesund, Norway, STX OSV has close to Key corporate events
9,000 employees worldwide and currently operates 9 Date Event
shipyards in Norway, Romania, Brazil and Vietnam. Listed on Mid • STX Europe's predecessor, Aker Yards, developed into a major
the Singapore Exchange on 12 November 2010, it is a spin- 1990's builder of passenger, merchant, and specialised vessels.
off from Norway-based STX Europe (formerly Aker Yards), 2000 - • Aker Yards acquired the Tulcea and Braila yards in Romania,
and houses the latter’s Offshore & Specialized Vessels 2003 the Niteroi yard in Brazil, and the Brevik yard in Norway. By
division. The STX Europe group (formerly Aker Yards) has a 2003, Aker Yards owned shipyards in Germany, Finland and
Norway.
rich heritage in shipbuilding, having been in the business of
designing and building vessels for >50 years. 2004 • Aker Yards listed on the Oslo Stock Exchange.
Shipbuilding is the mainstay, complemented by sales of 2011 • On 1 April, STX OSV announced grant of an environmental
design and equipment packages. STX OSV derives revenue licence for the construction of a second Brazilian yard in the
state of Pernambuco, paving the way for development work
mainly from the design and construction of complex and to progress without delay.
highly customized OSVs and other specialized vessels like
LNG-powered ferries, naval and coast guard vessels, fishing Source: STX OSV, STX Europe, DBS Vickers
vessels and non-offshore related icebreakers with customer-
specific applications. This accounted for 92-97% of total
revenue over FY07-09.
Page 5
Company Focus
STX OSV Holdings Limited
*NB: From FY10 onwards, STX OSV does not disclose revenue Closest competitors predominantly European. While to a
breakdown in this format.
limited extent, certain other STX Group companies are also
Source: STX OSV, DBS Vickers engaged in the construction of certain OSVs and specialized
vessels, these are generally not as complex as those built by
Key customers by % of total revenue STX OSV. In terms of external competition, STX OSV’s main
competitors within its market segment still predominantly are
Major Customers 2007 2008 2009 1H10
other Norwegian and European shipyards that focus on
DOF 19% 27% 38% 30%
developing own design concepts and innovations. These
Farstad Shipping 13% 17% 12% 2%
include Ulstein Group ASA, Kleven Maritime AS, Havyard
AP Moller-Maersk 7% 19% 4% 0%
Group AS and Bergen Group ASA from Norway; IHC
Island Offshore 14% 5% 2% 1%
Merwede B.V. in the Netherlands for certain specialized
Solstad Offshore 0% 1% 6% 14%
vessels.
Nordcapital 3% 8% 4% 2%
"K" Line Offshore 0% 1% 5% 15%
% of revenue by customer location
Petroleum Geo-Services 5% 4% 2% 0%
Aker Oilfield Services 0% 1% 4% 8% 100%
Rem Offshore 1% 0% 3% 6%
% of total revenue 62% 83% 82% 77% 80%
NB: The table above only lists customers which accounted for at least
5% of total revenue in any period from 2007 to June 2010. Other 60%
notable customers (past and/or current) of STX OSV include Aker
Solutions, Olympic Shipping, Siem Offshore, Deep Sea Supply, Simon 40%
Møkster Rederi, Gulf Offshore and Tidewater.
20%
Source: STX OSV, DBS Vickers
0%
Customers are mainly vessel operators. STX OSV’s customers
FY07 FY08 FY09
are primarily vessel operators which provide logistics support Norway EU North America South America Asia Others
and offshore construction and field operation services to
companies operating globally in the oil and gas industry. Source: STX OSV, DBS Vickers
Asset speculators do not feature as key customers given that
STX OSV typically builds highly specialised/customised vessels.
Page 6
Company Focus
STX OSV Holdings Limited
33.7% 33.6%
STX Offshore & Shipbuilding Co. Ltd STX Engine Co. Ltd
66.7% 33.3%
100%
STX Norway AS
100%
STX Europe AS
100%
STX OSV RO STX OSV Estaleiro STX OSV ST OSV STX OSV STX OSV Brevik
STX OSV Design STX OSV Piping
Holding SRL Niteroi SA Promar SA Singapore Pte Ltd. Electro AS Accommodation AS Holding AS
AS (Norway) AS (Norway)
(Romania) (Brazil) (Brazil) (Singapore) (Norway) (Norway) (Norway)
Page 7
Company Focus
STX OSV Holdings Limited
STX OSV’s vessels used in multiple phases over the offshore more effectively, reducing manufacturing time and errors. As
field lifecycle. The OSVs built by STX OSV (hereafter also such, the group typically secures vessel orders through an
referred to as “the group”) are used across the oil services invitation of the customer rather than through competitive
industry, particularly in offshore oil and gas exploration and bidding.
production to perform various functions, such as anchor-
handling, towing of rigs/floating production units, supply STX OSV has achieved industry “firsts”. With a robust in-
runs, offshore construction, pipelaying and eventual house vessel design and engineering capabilities, STX OSV
decommissioning. has achieved several significant industry milestones. A few
examples include the first vessel (Island Frontier) built to the
Focus on complex, advanced vessels. Within the OSV market, class notation “well intervention”, designed for operations
STX OSV focuses on the construction of more complex, previously performed by drilling units; the first AHTS
advanced offshore and specialized vessels, such as AHTS of (Normand Prosper) with a 24m wide extreme beam for
>20,000 BHP (brake horse power) and large PSVs of >4,500 significantly improved stability in harsh environments; and the
DWT (deadweight tons). These categories of vessels are first LNG-powered PSV (under construction; to be named)
required for harsh offshore environments and deepwater with the LNG storage located outside the cargo area, freeing
deployment. The construction of such high-end and up more cargo capacity for commercial operations.
customised OSVs requires a high degree of technology and
an experienced workforce capable of operating in a flexible Ability to develop new products. This includes the conceptual
manner. development of a large-scale oil recovery and standby vessel
designed to manage oil spill incidents. The group currently
One of few high-end OSV yards with in-house vessel design has a patent application pending on this vessel design. It also
capabilities. STX OSV Design AS, a wholly-owned subsidiary boasts an ability to develop and market its own vessel designs
of STX OSV, provides in-house expertise in both the design and electrical solutions such as automation and power
and construction phases of a newbuild project. This subsidiary management systems.
was started in 2000, and sold its first design around 2002. It
delivered 2 vessels in 2004 based on its first commercialised High degree of technology is the key competitive advantage
design, AH03. Today, STX OSV is one of leaders in vis-à-vis Asian competitors. While yards in countries such as
constructing and introducing highly advanced prototype Korea and China are more cost competitive and generate
vessels in the OSV segment to the market, and is one of the high production volumes, these apply mainly to more
few high-end OSV shipbuilders with its own in-house vessel standardized vessels in the traditional commercial
design and engineering capabilities. shipbuilding segment such as dry bulk carriers, tankers and
containerships. However, a growing number of Asian yards
Orders typically secured by invitation of customers. STX OSV’s have been progressing up the value chain over the recent
in-house design and engineering capabilities enables it to 1) years, building increasingly complex and specialised vessels.
help customers come up with innovative design solutions for As such, we view STX OSV’s high degree of technology and
new vessel prototypes, 2) tailor vessel specifications or make its ability to design, build and customise highly complex
adjustments to existing designs to meet its clients’ varying vessels as a key competitive advantage vis-à-vis its Asian
demands efficiently, 3) incorporate advanced technology into competitors.
actual production quickly, and 4) develop, coordinate and
improve the engineering and production at individual yards
Page 8
Company Focus
STX OSV Holdings Limited
Anchor handling • A dual purpose tug designed for anchor-handling and towage of offshore drilling units/ construction vessels/ floating production
tug supply vessel units, as well as to perform offshore supply duties.
(AHTS) • Fitted with special equipment on deck for moving anchors including a large winch.
• The main parameter of such a vessel is the propulsion power, measured in brake horsepower (BHP) or bollard pull (BP). AHTS engine
power typically ranges from 4,000 - 35,000 BHP; AHTS with >14,000 BHP are suitable for deepwater anchor handling duties.
• AHTS vessels can also perform supply functions as they are generally equipped with a sizeable free deck area and under deck tanks
specially designed for transporting liquid cargo and dry bulk.
Platform supply • Specially designed to transport liquid and dry cargo to and from offshore installations, drilling rigs and construction vessels.
vessels (PSV) • Have specially designed tanks under deck for transporting fuel, fresh water, drilling mud, cement and brine.
• Does not have anchor-handling equipment on the deck – results in a larger free deck area, for transport of containers, pipes and
other cargo, which is the main technical parameter for a PSV.
• Larger and more modern PSVs are considered to have at least 900sqm of free deck area. Medium PSVs have between 500 - 900sqm
of free deck area.
Offshore subsea • OSCVs serve as floating bases for carrying out various types of offshore construction work necessary for offshore oil and gas
construction vessels production.
(OSCV) • Such vessels are used for installation of offshore infrastructure such as platforms and pipelines; also involved in the later stage of the
oil and gas fields’ life cycle for maintaining, upgrading and decommissioning the infrastructure.
• Generally multipurpose vessels that can mobilize gear appropriate for a particular job. As such, they can vary greatly and often have
significant modular equipment installed for a particular task.
• Typically, OSCVs are equipped with large cranes, large accommodation capacity, and have different types of specialized construction
gear on board for performing construction work. Some of these are permanently installed while some are modular so that it can be
tailored to the specific operational requirements.
• Some of the key equipment include saturation diving spread and remotely operated vehicles (ROVs) for diving operations; some are
equipped with pipelaying equipment to install pipes of different diameters and in different water depths.
• Modern OSCVs are built with DP in order to optimize efficiency of construction activities and facilitate operations in deeper water.
Other vessels • STX OSV builds naval and coast guard vessels, seismic vessels, fishing vessels, icebreakers for non-offshore oil & gas markets, and
LNG-powered car and passenger ferries for Norwegian ferry operators.
STX OSV designs and builds vessels used in the various phases of the offshore field lifecycle
Page 9
Company Focus
STX OSV Holdings Limited
>200 vessels delivered since 2000; market leader in large Vessels delivered / to be delivered by STX OSV: a
AHTS/PSVs. It has delivered >200 offshore and specialized significant pickup in the proportion of vessels based on
vessels since 2000 and is currently the largest builder of AHTS its own designs
of >20,000 BHP and PSVs of >4,500 DWT, with a global
market share of 30.8% and 18.0% respectively, based on 25
N o. of ve sse ls
operated vehicle support vessels) with a 6.6% market share. 15
10
In-house generated vessel designs gaining traction in the
market. STX OSV’s in-house developed vessel designs are
5
achieving a high level of market acceptance by its customers.
Indeed, as of May 2011, out of the 49 vessels in the group’s
0
orderbook, 37 are based on STX OSV’s own design. Based on
2004 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F
data from RS Platou, 28.1% of PSVs of >4,500 DWT and
30.8% AHTS of >20,000 BHP in the global orderbook (as of STX OSV design Non STX OSV design
end August 2010) are based on STX OSV’s designs. This NB: This excludes the orders for 8 LPG carriers for Transpetro, to be
represents a dramatic increase from only 5.6% and 12.7% delivered over 2014-16.
respectively of such vessels delivered since 2000.
Source: STX OSV, DBS Vickers
Newbuilds: STX OSV commands a leading market share in the AHTS (>20,000 BHP) and PSVs (>4,500 DWT) markets
30% 15%
20% 10%
10%
5%
0%
0%
STX OSV
Shipbuilding
Shipbuilding
Maritime
Drydocks
PT Batamec
Havyard
Thoma-Sea
Maritime
American
Sino-Pacific
Mawei
Kleven
World
Shipbuilding
Cochin
Shipbuilding
STX OSV
Wuchang
Fujian
Kleven
Universal
Eastern
North
Dalian
O SCV
10%
8%
6%
4%
2%
0%
ABG
Colombo
STX OSV
Shipbuilding
Drydocks
Bergen
World
Dalian
Page 10
Company Focus
STX OSV Holdings Limited
In-house vessel designs gaining traction: STX OSV has leapfrogged other leading vessel designers with an increased
market share (PSVs of >4,500 DWT and AHTS of >20,000 BHP) based on its in-house generated designs
MMC (Poland)
STX OSV (Norway)
Ulstein (Norway)
Rolls-Roy ce (UK)
Wartsila (Finland)
Current orderbook (as of end Aug 2010) Current orderbook (as of end Aug 2010)
Vessels built after 2000 (as of 30 June 2010) Vessels built after 2000 (as of 30 June 2010)
Page 11
Company Focus
STX OSV Holdings Limited
Network of yards strategically located within key and growing oil and gas markets
Leveraging off North Sea exposure. STX OSV is competitiveness, the less sophisticated and labour intensive
headquartered in Norway, which is home to a distinct cluster fabrication of vessel hulls is conducted at the group’s yards in
of leading companies involved in the offshore marine design, Romania, a lower cost country. The group intends to
equipment manufacturing, shipbuilding and ship operation gradually develop its Romanian yards to be capable of
industries. By leveraging off its significant know-how and completing a larger proportion of the entire vessel
experience gained from its proximity to the North Sea, construction, vs. limited to hull production.
characterised by the harsh operating environment offshore
and stringent regulatory safety and environmental standards Vietnam and Brazil yards are able to build complete vessels.
imposed by governments across Northern Europe, STX OSV is The group can also build entire vessels in one location – in
able to provide some of the most advanced solutions and Brazil or Vietnam. STX OSV was one of the first foreign OSV
services to its customers worldwide. builders in Brazil, commencing shipbuilding operations in the
country in 2001. Along with its consistent track record, it has
Strategic location of yards. STX OSV currently has 9 yards in been able to capture a significant 45% market share (based
operation - 5 of them are in Norway, 2 in Romania and 1 on % of vessels under construction, according to RS Platou
each in Brazil and Vietnam. Its network of yards is data) in the country where locally built OSVs with higher local
strategically located around the world, enabling the group to content are favoured over foreign-built vessels. The yard in
maintain its competitive advantage in innovation, cost Vung Tau, Vietnam, began operations in April 2008. It
efficiency, manufacturing flexibility, while leveraging off its delivered its first vessel 24 months later in May 2010. To
close proximity to key offshore oil and gas markets to tap on date, it has successfully delivered 3 vessels (12-16k BHP
regional opportunities and expand its customer base. AHTS), with 5 more in the orderbook.
Network of yards can deliver 23-25 vessels/year. STX OSV Expansion plans to coincide with actual requirements. As the
typically takes 18 to 24 months to construct and deliver a group’s existing yards impose limitations on the maximum
vessel to its customers, based on its existing yard capacity. vessel size and number of vessels that can be built a year,
Depending on the mix of vessel types and vessel sizes in the there are plans to expand facilities to increase capacity as well
orderbook, the group is able to deliver between 23 and 25 as to accommodate larger construction projects. For example,
OSVs a year; it delivered an average of 23 vessels per year the group is looking to expand the launch facility in the
over 2007-2010. Tulcea yard in Romania, allowing projects with a wider
breadth to be undertaken. We understand that the group will
Norway-Romania value chain leverages on Norway’s high only kick start this initiative once there is a project in place
technical capabilities and Romania’s lower cost structure. STX which demands such infrastructure support.
OSV undertakes higher value and technically complex
outfitting works on completed vessel hulls at its yards in Potential expansion of capacity or capability via acquisitions
Norway, where it has access to a pool of highly skilled or partnerships. STX OSV may consider strategic acquisitions
engineers and designers. Many of these yards have been in or partnerships to expand production capacity and design
operation for >60 years, with significant accumulated and engineering capabilities. It also continuously evaluates
experience in the construction of various types of specialised potential acquisitions of engineering firms with expertise in
vessels for customers across the world. To enhance its cost specialised technologies.
Page 12
Company Focus
STX OSV Holdings Limited
^ Total capex for the Pernambuco yard is c. US$100m over a period of 3 years; 75% of this to be debt funded by the Brazilian Merchant Marine
Fund. The remaining 25% will be equity funded: 50.5% by STX OSV, with the remaining 49.5% to be funded by JV partner, PJMR
Empreendimentos Ltda.
Page 13
Company Focus
STX OSV Holdings Limited
Prorefam: Brazil’s ambitious fleet renewal plan. In 2008, vessels (28 PSVs, 4 AHTS, and 6 ORSVs) have been
Petrobras together with the Brazilian government launched contracted, implying an outstanding balance of 108 vessels
the fleet renewal programme known as “Prorefam”, which required. According to industry publication Upstream,
seeks the construction of 146 supply vessels, divided into 7 Petrobras would have received tenders for the third round of
blocks, over 2008 to 2014. As per Brazilian law, these vessels contracting under Prorefam in April 2011, with 20-24 orders
have a strict local content requirement, which stipulates that up for grabs. Indeed, Petrobras was reported to be already
70-80% of the vessel must be built locally, depending on considering the possibility of contracting more vessels in the
vessel type. future to cope with the massive pre-salt demands.
These vessels will be used to support new and existing New yard in Pernambuco will reinforce leading market share.
projects, in particular, Brazil’s ambitious plans to develop its In anticipation of the robust local demand for such vessels,
massive pre-salt oil reserves, as well as to replace an aged STX OSV is developing a second shipyard in the municipality
Brazilian fleet – out of the current fleet of 240 supply vessels of Ipojuca, in the Brazilian state of Pernambuco. This second
in Brazil, only 30% are Brazilian flagged, averaging 20 years yard is expected to reinforce the group’s leading position in
old. Brazil, with a commanding market share of 45%, based on
vessels under construction as of June 2010 according to RS
The Petrobras Prorefam fleet renewal programme Platou.
Vessel model Quantity
Brazilian capacity to increase to 6-8 vessel deliveries per year.
AHTS 21,000 HP 8 Once in full operation, it will be able to deliver 4-5 larger
18,000 HP 46 vessels, on top of the existing Niteroi yard’s capacity of 2-3
15,000 HP 10 vessels per year, bringing the group’s total Brazilian capacity
PSV 4,500 tons 49 to 6-8 vessels/year. The new yard will feature a more modern
3,000 tons 15 and streamlined layout and production facilities, with a
Oil Recovery Supply 18
significantly higher production capacity of 20,000 tons hull
Vessel (ORSV)
weight per year, vs. the group’s existing Niteroi yard of 8,000
Total 146
tons/year. This new yard will enable STX OSV to build more
Source: Transpetro and larger/more complex vessels to service the growing
Brazilian market.
Delivery plan of critical resources under Petrobras’
2010-2014 business plan New yard to commence building the first vessel in 2012;
Delivery plan (accumulated value) financing approval on Transpetro’s 8 LPG carriers a likely
Situation catalyst. The yard will kick off partial operations in mid 2012,
Critical as of Dec
resources 2009 By 2013 By 2015 By 2020 commencing with the construction of the first of a series of 8
LPG carriers for Petrobras Transporte S.A., or Transpetro,
Drilling rigs 5 26 31 53 secured in 2010. These contracts, however, will only become
water depth effective once financing approval is given by Brazil’s
>2000m
Supply and 254 465 491 504 Merchant Marine Fund. Total contract value is approximately
Special Vessel US$536.3m (NOK3.1bn), with delivery expected between
2014-2016.
Production 41 53 63 84
platforms
(semisubs and Yard development work has commenced. In April 2011, the
FPSO) group secured the environmental licence required for the
Others (Jacket 79 81 83 85 construction on the yard, paving the way for development
and TLWP)
work to progress without delay. Construction of the yard will
Source: Petrobras
begin in 2Q2011, with the yard to be in full operation in
2013. We only expect the group to be able to take on other
Orders to be awarded under third round of tender. To date, third party orders from mid 2014, considering the capacity
under the first 2 phases of the programme, a total of 38 tied up on the 8 LPG carriers.
Page 14
Company Focus
STX OSV Holdings Limited
Resumption of offshore E&P spending Oil demand under three scenarios vs. global liquids
production capacity
Oil demand growth underpinned by global economic growth.
Given the close correlation between GDP and energy
consumption, oil demand in 2011 will continue to be driven
on the back of improving world economies. Against this
backdrop, Douglas-Westwood warns of a possible oil supply
crunch. It notes that oil demand growth in previous economic
recoveries (i.e. 1976-1978 and 2002-2004 periods) averaged
between 7.3mb/d and 7.7mb/d. If we were to apply similar
growth patterns on today’s demand, this could lead to a
possible oil supply crunch in 2012-13, based on current
supply projections.
More investments into exploration and production (E&P) are Source: IEA, Douglas-Westwood
required to meet projected demand growth and avoid a
potential supply crunch. With oil prices and input costs at Global offshore oil and gas production spend (capex
levels which make most projects economically viable, oil and opex, in US$bn)
companies are also increasing focus on growing production.
Industry consultants Energyfiles/ Douglas Westwood
estimates that over the next 5 years, world offshore oil and
gas production spending would amount to US$874bn, with
growth to pick up more significantly from 2011 onwards.
Page 15
Company Focus
STX OSV Holdings Limited
Asset replacement cycle 479 for PSVs, or around 23% of the existing global fleet. This
number will be significantly higher if we were to include
Global AHTS / PSV fleets are highly aged, represents large vessels >25 years old.
replacement potential. The global AHTS and PSV fleets are
highly aged, averaging 16.9 years and 17.5 years respectively. Enhanced safety requirements for offshore drilling. The
Excluding vessels delivered over the last building boom from Macondo disaster in the US Gulf of Mexico in April 2010 led
2005, the average age of the global fleet would be even the US government to impose a 6-month moratorium on
higher at 26.7 and 23.8 years respectively. This implies that certain drilling activities in the GOM from 30 May 2010. The
many vessels were built based on technological and safety moratorium was eventually lifted only upon the adoption of
standards more than 20 years ago, implying an increasing stricter and enhanced regulations.
technical demand/supply mismatch, and will face increasing
difficulties in meeting the more stringent safety and Increased focus on safety spurring new orders. Following the
environmental standards, as well as the tougher offshore Macondo disaster, industry players have noted a flight to
drilling and production conditions. quality, with oil and gas companies increasing emphasis on
quality and capability of equipment, and favouring
Assuming vessels >30 years are removed from the market, we contractors with established operational experience and track
estimate that replacement demand to be 496 for AHTS and record.
250
Avg age of exis ting AHTS fleet = 16.9 years
Avg age of AHTS delivered pre- 2005 = 26.7 years
200
No. of deliveries
150
100
50
0
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
<4,000 BHP 4,000 - 7,999 BHP 8,000 - 12,000 BHP >12,000 BHP
500
450 Avg age of exis ting PSV fleet = 17.5 years
400 Avg age of PSV s delivered pre-2005 = 23.8 years
N o. of de live rie s
350
300
250
200
150
100
50
0
<=1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Page 16
Company Focus
STX OSV Holdings Limited
Younger vessels post better utilisation rates; newer tonnage costs. This translates into high efficiency and utilisation rates
preferred. While the enhanced safety requirements do not for both the vessel owner and charterer. Modern vessels will
explicitly cover OSVs, data from ODS Petrodata reveals a also be equipped with enhanced features that would allow it
growing divergence in utilisation rates between younger and to meet today’s stricter HSE standards.
older vessels, similar to what has been observed in the rig
market (refer to our 10 March 2011 Offshore & Marine Growing divergence in utilisation rates between
report “Offshore on the radar”). Indeed, the average age of younger vs. older vessels
the growing fleet of idled AHTS and PSVs stands at 21.7 and
25.0 years respectively. Of which, 66% and 71% of idled
AHTS and PSVs are 20 years or older.
PSV s - av erage age of idle v essels: 25.0 y ears A HT S - av erage age of idle v essels: 21.7 y ears
0-19 y ears
>= 30
>= 30 29%
y ears 0-19 y ears
y ears 31% 34%
40%
20-29
y ears 20-29
31% y ears
35%
Source: ODS Petrodata, DBS Vickers
Page 17
Company Focus
STX OSV Holdings Limited
As E&P activities move into deeper waters and This trend favour younger, more advanced and higher
harsher environments, demand for advanced, specification vessels. As offshore activities move into deeper
high spec OSVs to increase in tandem waters and harsher environments, the installations have also
become more sophisticated. This has resulting in an evolution
Deeper waters / harsh environment hold the key to future oil
in OSV design with a greater emphasis on research and
supply. Offshore oil and gas discoveries across all water
development, equipment able to deliver higher performance,
depths have been declining steadily, with deepwater
and OSVs with larger tonnage and cost effectiveness.
discoveries comprising a growing proportion, from around
30% in 1999 to almost 40% in 2009.
Indeed, based on data from ODS Petrodata, while orders for
Industry consultants project robust deepwater capex over the new AHTS and PSVs have both declined, we note that recent
next 5 years. The lack of new opportunities in shallow waters new orders are primarily those of higher BHP AHTS or larger
and the need to offset the decline from existing reservoirs are DWT PSVs. Some of these large BHP AHTS and PSVs are
driving deepwater investment at a much higher rate than in aimed at the offshore construction market, with added
previous years. According to industry consultants Douglas- functionality such as large subsea cranes, increased
Westwood, deepwater expenditure is projected to record accommodation capacity and moonpools.
79% growth in capex over 2011-2015 to US$206bn, from
that recorded in the past 5 years. Size profile (in BHP) of AHTS delivered/to be delivered
since 2001
The robust outlook for deepwater activity has led many
international drillers to place orders for deepwater drilling
rigs, with a total of 29 floaters (3 semisubmersibles, 26
drillships) ordered globally since October 2010 to end April
2011. The market for floating production and storage
systems is also on the rise with the International Maritime
Associates observing a growing number of floating
production or storage systems being planned or under study,
with 196 units as of November 2010 vs. 178 in July.
Page 18
Company Focus
STX OSV Holdings Limited
No. of v e sse ls or de r e d
150
AHTS orders still slow, due to overbuilding over 2005-10. The
AHTS market, however, has remained subdued, with annual
100
orders continuing on a downward trend since 2007’s peak of
313 orders to 2010’s 65. Indeed, we believe this is due to
overbuilding in this segment since 2005, which has seen 769 50
AHTS delivered since, vs. 486 PSVs. This saw AHTS to rig ratio
jump from 2.3x in 2004 to 2.9x currently, led mainly by the
0
<8,000 BHP AHTS category; PSVs saw this ratio increase 2004 2005 2006 2007 2008 2009 2010 2011YTD
slightly from 2.2x to 2.5x over the same period.
<3,000 dwt 3,000-4,000 dwt >4,000 dwt
Utilisation rate of AHTS currently below PSVs. As such, it is
Source: Clarksons, DBS Vickers
not surprising that the utilisation rate in the global AHTS
market continues to decline, at c. 68% as of end 2010, AHTS utilisation rate continues on downtrend
according to ODS Petrodata. For PSVs, the decline in global
utilisation rates seems to have bottomed at around 72% at Gl o b a l AHTS a n d PSV h i s to ri c a l u ti l i s a ti o n ra te
end 2010, likely due to a healthier demand/supply balance. (%)
100%
95%
Day rates for PSVs and larger AHTS have generally improved
from recent troughs. The demand/supply scenario is also 90%
reflected in vessel day rates, with all classes of PSVs now 85%
fetching higher day rates vs. the recent trough. While this is 80%
not the case across the AHTS market with day rates for the 75%
<10,000 BHP category still languishing near the bottom, we AHTS PSV
70%
note, however, that the larger vessels (i.e. >10,000 BHP) are
commanding improved day rates. 65%
60%
Annual AHTS orders have yet to recover… 2005 2006 2007 2008 2009 2010
250
200
150
100
50
0
2004 2005 2006 2007 2008 2009 2010 2011YTD
Page 19
Company Focus
STX OSV Holdings Limited
Day rates for global AHTS term fixtures Demand for OSVs to grow, proxied by higher rig count.
We use contracted offshore rig count as a proxy for OSV
demand (both AHTS and PSVs). According to data from ODS
Petrodata, the demand for offshore rigs (jackups,
semisubmersibles and drillships) is projected to grow by 93
units by end 2011, representing a growth of 18% from
current levels, underpinning near term demand for OSVs.
80
Notwithstanding the expected pick up in demand for OSVs,
60 we only expect AHTS newbuild orders to recover in a more
40 significant way from 2012 onwards, as the market continues
to digest the additional capacity being delivered from the
20
orderbook. We expect this to be led by the >8,000 BHP sized
0 categories as E&P activities move into more demanding
2011 2012 2013 2014+
environments, supported by a healthier demand/supply ratio
<2,000 dwt 2,000-3,000 dwt 3,000-4,000 dwt >4,000 dwt of 2.4x AHTS (>8,000 BHP) per rig (floater) vs. 3.2x for the
smaller AHTS (<8,000 BHP) category.
Source: Clarksons, DBS Vickers
250
200
N o. of ve sse ls
150
100
50
0
2011 2012 2013 2014+
< 4,000 bhp 4,000 - 7,999 bhp 8,000 - 12,000 bhp > 12,000 bhp
Page 20
Company Focus
STX OSV Holdings Limited
FY12F
FY13F
FY07
FY08
FY09
FY10
FY14-16
Page 21
Company Focus
STX OSV Holdings Limited
-1.7ppt impact on the reported FY07-09 EBITDA margins. This translates into FY11/12 EBITDA margins of 11.4%/
Looking ahead, we believe the predominant use of internally 10.9% vs. FY07-10’s average of 4.0%.
developed and proven vessel designs and timely deliveries by
suppliers will help mitigate the reoccurrence of such issues in Typical cost drivers for the various vessel types
the future. Components of cost of
vessel construction AHTS PSV OSCV Others
Steady expansion in margins since late 2009. Since 3Q09, Engine & machinery 24% 12% 21% 14%
Other equipment 37% 43% 36% 39%
STX OSV has delivered a steady expansion in EBITDA (EBIT)
Hull (ex steel) 14% 19% 16% 19%
margins, from 5.8% (4.8%) in 3Q09 to 13.8% (12.8%) in
Steel 4% 5% 5% 5%
1Q11. Indeed, we note that since 3Q10, the group has
Labour 9% 9% 10% 12%
managed to sustain its EBIT margins at >11%.
Finance cost 3% 2% 2% 1%
Others 10% 11% 10% 10%
Good project execution and efficiency gains are main drivers Total 100% 100% 100% 100%
for recovery in margins. STX OSV has taken steps to
Source: STX OSV
strengthen the integration of the design, engineering and
construction phases in the value chain between Romania and
STX OSV quarterly revenue and EBIT margins
Norway. This has led to improved operational performance
from the streamlining of production processes, as well as NOK m
Margin recovery to be sustained. On the back of the 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
Segmental Analysis
FY Dec (NOK m) FY07 FY08 FY09 FY10 FY11F FY12F FY13F
Revenue
Offshore & specialised vessels 8,829 11,219 11,751 11,881 12,439 13,794 14,277
Other operations 601 152 144 0 0 0 0
Total 9,431 11,370 11,895 11,881 12,439 13,794 14,277
Annual order intake 15,461 5,692 4,458 12,555 13,000 12,000 15,000
Order backlog (as at end of period) 27,363 22,389 16,411 17,031 17,592 15,798 16,521
Book-to-bill ratio 2.4 1.9 1.4 1.4 1.3 1.1 1.0
Source: STX OSV, DBS Vickers
Page 22
Company Focus
STX OSV Holdings Limited
Key Risks
Risk of cost overruns on fixed price contracts is higher in a pay for the vessels. However, we note that through the
rising cost environment. Most of STX OSV’s shipbuilding recent global financial crisis, STX OSV did not experience
projects are fixed price contracts, except for a few that issues on accessibility to funds or any customer defaults or
include price adjustment provisions in the event of steel price cancellations.
increases. To mitigate the risk of cost overruns, STX OSV
typically negotiates the price of major equipment and Threat of new entrants. There have been many new entrants
supplies, and will factor in all such costs in contract price on to the OSV shipbuilding industry in recent years, especially
contract signing. Labour and funding costs are two major from more cost efficient countries such as Korea and China.
cost drivers that are not hedged, and are priced into the This could result in an increased competition for a limited
contract based on best estimates for inflation. number of new orders, adversely impacting pricing power, or
significantly push down prices for newbuilds.
Late delivery of vessels. Many of STX OSV’s contracts provide
for damages for late delivery. While it typically has a 30-day Forex risks. STX OSV’s shipbuilding contracts are mainly
grace period beyond contractual delivery date to deliver the denominated in NOK and, for certain orders in Brazil,
vessel to its customers, any substantial delay could result in Romania and Vietnam, in US dollars. Costs are incurred
the group being liable to pay its customers liquidated mainly in NOK, Euro, US dollars, Real, RON and Vietnamese
damages. Such delays could arise due to delay of certain key Dong. This exposes the group to forex risks, which is
materials, equipment or components from its suppliers. mitigated by hedging most of its forex exposure that arises
from foreign currency transactions with the use of financial
Compensation from third party design contracts may not instruments/ hedge contracts.
adequately cover losses. STX OSV occasionally uses third party
vessel designs. In the event of a delay in vessel delivery due to Share overhang from potential placement by parent. It was
design flaws, the design purchase contract typically provides recently reported in the media that STX Europe, parent
for compensation by way of liquidated damages. However, company of STX OSV, may look to divest a 20% stake in the
the contracts typically include a cap on the compensation latter. While STX Europe is subject to a 12-month lock-up
amount, and the compensation available under the contracts period (ending 12 November 2011) for its interests in STX
may be less than the actual losses suffered by the group. OSV, it may, however, after the first 6 months from listing
(i.e. from 12 May 2011), be granted exemptions from this
Back-end loaded payment terms implies heavy reliance on with the prior written consent of the Sole Global
external sources to fund working capital. The payment terms Coordinator. This share overhang could weigh on share price
STX OSV typically extends to its customers is back-end performance in the near term. However, we believe with a
loaded, with 20% upfront and the remaining 80% upon larger free float, this would be beneficial to the stock’s
delivery. This implies STX OSV’s access to ready financing is liquidity in the longer term. Nonetheless, with STX Europe
crucial to the business to fund its working capital. This is met intending to hold a majority stake in STX OSV, this implies
via construction loans from banks. As such, we believe a that it could potentially divest up to c. 18.9% of its current
potential deterioration of the credit markets is a risk to the 69.02% stake, to hold 50.1% post divestment.
group’s access to funding as well as its customers’ ability to
Page 23
Company Focus
STX OSV Holdings Limited
A robust 1Q11. Headline net profit was up 28% y-o-y to Margins continue to develop positively. STX OSV continues to
NOK310m; stripping out exceptionals from unqualified display sustained improvement in its operating margins.
hedges and embedded derivatives, we estimate recurring net Management attributed this to sustained good project
profit to be NOK303m, +150% y-o-y. This robust set of execution with high rate of on-time deliveries,
results was driven by higher revenues (+20% to NOK3.2bn) implementation of cost efficiency measures, and improved
and 3.0ppt expansion in EBIT margins to 13.8%. The group operational performance from stronger integration and good
delivered 6 vessels (2 AHTS, 2 PSVs, 2 OSCVs) during the collaboration between design, engineering and construction
quarter. in the Romania-Norway value chain.
Page 24
Company Focus
STX OSV Holdings Limited
Page 25
Company Focus
STX OSV Holdings Limited
Historically high net gearing. STX OSV had a high historical during the period as well as the overall percentage of
net gearing level, ranging from 3.4-6.0x over FY07-09. This completion of the group’s order backlog. The group typically
was mainly attributable to construction loans required to collects the outstanding balance of the contracted amount
finance the construction of vessels in its orderbook given the from customers upon vessel delivery, while paying down the
back-end loaded payment terms extended to its customers, amount drawn under the construction loans. This will be
as well as its low equity base across this period. Following the offset by other projects under construction, for which the
group’s successful IPO on the SGX, its net gearing improved group may draw down on the construction loans according
significantly, to 0.78x as at end FY10, and 0.17x as at end to the percentage of completion of the respective projects. As
1Q11. such, investors should note that net gearing is likely to
fluctuate quarter to quarter. We project net gearing of 0.57x
Expect gearing level to fluctuate. STX OSV’s net gearing level and 0.55x by end FY11/12.
is generally a function of the number of vessels delivered
Breakdown of Assets (2011) Breakdown of Capital (2011) Financial Leverage & Net Debt to Equity
Page 26
Company Focus
STX OSV Holdings Limited
Capex relates mainly to the new Brazilian yard. As per the Target 30% dividend payout ratio implies attactive yield of
IPO prospectus, the group estimates capex to be around 4.2-4.5%. STX OSV aims to pay a stable and rising divdend
NOK990m. This will be directed towards the expansion and over time. To this end, it aims to pay out annual dividends of
improvement of yard capacity, contruction of the new not less than 30% of its PATMI. This will translate into a
shipyard in Brazil, improvement of capacity and equipment at dividend yield of 4.2-4.5% over the FY11-12 periods. FY10
the Romania and Vietnam yards, as well as other acquisitions payout ratio of 15% is likely to be an exception – this was
and investments. With capex of NOK23m incurred in 4Q10, based on 100% payout of the group’s profits made between
we have spread out the outstanding capex budget across 25 October to end December 2010, based on the short
FY11-13. This will be mainly driven by the development of consolidation period under the new group structure.
the second yard in Brazil over 2011 to 2013 , with a total
development cost of c. US$100m, of which, around 70%
could be debt financed.
Cash Flow Trend Free Cash Flow Per Share Free Cash Flow As At Year End
1.02
CF from Op CF from Invt CF from Fin Free Cash Flow Per Share Free Operating Cash Flow Per Share 2009A 2010A 2011F 2012F 2013F
Page 27
Company Focus
STX OSV Holdings Limited
Normalised ROAE of >20% can be expected. STX OSV posted (due to low pre-IPO equity base). Post IPO, we expect ROAE
an exceptionally high ROAE of 60.8% in FY10, mainly due to to normalise at >20%, supported by stable margins and
a robust earnings performance and a low average equity base gearing levels.
ROAE / ROAA Trend (%) Margin Trend (%) Total Debt & Gross Interest Cover
20%
60.0% 7000
18% 51.2x
Profitability Ratios
Sales Growth (%) 20.6 4.6 (0.1) 4.7 10.9 3.5
Gross Margin (%) 15.9 23.4 30.0 30.2 29.3 29.0
Operating Margin (%) (2.8) 4.4 10.2 10.4 10.0 9.8
Net Profit Margin (%) (1.3) 0.8 8.7 7.2 6.9 6.7
ROAE (%) (19.9) 10.4 60.8 32.6 27.4 23.2
ROA (%) (1.3) 0.7 7.7 7.3 7.2 6.7
ROCE (%) (4.9) 3.8 10.7 11.4 10.9 10.1
Activity Ratios
Debtors Turn (average days) 80.6 82.1 58.6 55.2 54.2 56.1
Creditors Turn (average days) 188.7 252.8 230.2 167.8 142.8 148.2
Inventory Turn (average days) 225.4 342.1 329.8 238.4 223.3 257.4
Total Asset Turnover (x) 1.0 0.8 0.9 1.0 1.1 1.0
Fixed Asset Turnover (x) 11.0 10.9 11.4 11.0 10.2 9.2
Page 28
Company Focus
STX OSV Holdings Limited
Valuation
Comparables. STX OSV is a leading global builder and PE multiple used as our primary valuation methodology.
designer of advanced, high specification and highly We believe the PE multiple is the most appropriate
customised offshore support vessels. Its main competitors methodology to use in valuing STX OSV as earnings and
are predominantly Norwegian and European shipyards that earnings growth are key value drivers for this company, and
focus on developing own design concepts and innovations. PE is widely used as a relative measure among the
These include Ulstein Group ASA, Kleven Maritime AS, Singapore-listed yards, both large and small/mid caps.
Havyard Group AS, and Bergen Group ASA from Norway,
and IHC Merwede B.V. in the Netherlands for certain Target price of S$1.86 on 11x blended FY11/12 PE. Given
specialized vessels. However, most of these yards are not STX OSV’s unique positioning in the industry, we use a
listed. valuation multiple of 11x PER, derived from the average
historical forward PE among the large (13.3x) and small/mid
In Asia, its most likely competitors with such capabilities cap (8.2x) Singapore listed yards. Applying this to blended
would include the established yards like Keppel Corp and recurring FY11/12 EPS, we drive a target price of S$1.86.
Sembcorp Marine in Singapore, as well as the Korean yards
like Hyundai Heavy Industries, Daewoo Shipbuilding & Unwarranted discount to smaller local yards, initiate
Marine Engineering, and Samsung Heavy Industries. These coverage with BUY; upside of 55%. At 7x FY11 PE, STX OSV
yards, however, tend to focus on the bigger value projects is trading at an unwarranted discount to peers. Valuations
such as rigbuilding (jackups, semisubmersibles and drillships), are supported by steady 15% earnings CAGR over FY10-12
FPSO conversion and newbuildings, production topsides and (vs. negative to flattish FY11F earnings growth among
so on; specialised shipbuilding projects are not their core Singapore peers) on a sustained recovery in margins and an
earnings driver. attractive dividend yield of 4.2-4.5%. We initiate coverage
on STX OSV with a BUY recommendation, with 55% upside
The other Singapore listed OSV builders include Jaya and ASL to our TP of S$1.86. We view potential near term catalysts
Marine, which generally focus on small to mid sized OSVs, from the approval of financing on the 8 Transpetro LPG
and Otto Marine which focuses on mid to large OSVs. While carriers, which will make the contracts effective, as well as
in a similar space, we believe STX OSV stands out for its OSV order wins.
track record in OSVs and its strong in-house design and
engineering capabilities.
Peers comparison
Company Curncy FYE Mkt Price
Cap (S$) PE (x) P/BV (x) EV/EBITDA
(US$m) 10F 11F 12F 10 11F 10F 11F
Keppel Corp Ltd SGD Dec 14,754.3 11.40 14.2 14.3 12.9 3.0 2.7 10.3 10.5
SembCorp Marine Ltd SGD Dec 8,884.6 5.33 13.7 15.5 14.5 4.3 4.3 7.6 10.0
Cosco Corp Singapore Ltd SGD Dec 3,687.9 2.06 20.9 18.3 15.2 3.8 3.4 9.7 7.2
Average 16.3 16.0 14.2 3.7 3.5 9.2 9.2
ASL Marine Holdings Ltd SGD 06/2010 210.1 0.62 6.9 9.3 7.4 0.8 0.8 5.6 5.1
Jaya Holdings Ltd SGD Jun 351.0 0.57 3.7 6.4 7.0 0.9 0.8 3.6 5.1
Otto Marine Ltd SGD 12/2010 333.9 0.22 10.1 10.1 10.0 0.9 0.8 12.5 11.3
Average 6.9 8.6 8.1 0.9 0.8 7.3 7.2
ABG Shipyard Ltd INR 03/2010 409.1 360.55 8.5 7.9 6.7 1.7 1.4 8.9 7.8
Bharati Shipyard Ltd INR 03/2011 94.6 145.45 3.1 7.7 92.3 0.5 - 7.9 8.0
Bergen Group AS NOK 12/2010 86.0 7.90 NM 6.9 3.4 0.3 0.3 3.5 2.6
Coastal Contracts Bhd MYR 12/2010 431.2 3.62 6.5 6.3 6.1 2.2 1.6 5.3 5.1
Average 6.0 7.2 27.1 1.2 1.1 6.4 5.9
Daewoo Shipbuilding & Marin KRW 12/2010 7,586.2 41,850 10.5 11.1 12.9 2.0 1.8 8.5 8.4
Hyundai Heavy Industries Co KRW 12/2010 32,805.8 445,500 7.6 8.1 7.9 2.1 2.0 7.1 6.8
Samsung Heavy Industries C KRW 12/2010 9,405.1 42,650 10.8 12.2 12.8 2.5 2.3 8.6 8.6
STX Offshore & Shipbuilding KRW 12/2010 2,060.0 27,500 28.6 14.9 6.0 1.3 1.2 5.9 4.1
Average 14.4 11.6 9.9 2.0 1.8 7.6 7.0
STX OSV Holdings Ltd SGD Dec 1,084.9 1.15 8.4 6.8 6.4 2.5 1.9 5.9 5.5
Page 29
Company Focus
STX OSV Holdings Limited
Appendix
1) Management team
STX OSV’s senior management team is led by Mr Roy Reite, thorough understanding of their various requirements.
Executive Director and Chief Executive Officer. The team of Through their close working relationships with their
industry veterans have an average of over 15 years of industry customers together with first hand market knowledge, this
experience, and a have proven execution track record. Along enables the team at STX OSV to develop technologically
with their wealth of experience, they have also established advanced prototype vessels.
solid long term relationships with customers, as well as a
Management Team
Manager name Position Details
Mr. Roy Reite Executive Director Mr. Reite is responsible for managing the day-to-day operations of the company. He has been
& Chief Executive president of STX OSV since 2001. He has extensive industry experience, having worked in the
Office current industry since 1990. Presently, Mr. Reite is also the deputy chairman of Sparebanken
More, a Norway-based regional bank, and holds a Master of Science from the Norwegian
University of Science and Technology.
Jan Ivar Nielsen Executive Vice Mr. Nielsen serves as the head of the Finance Department. He joined the Group in 2007 as Vice
President & CFO President of Finance of the Group's operations in Brazil, and was made CFO of the Group in
2009. Mr. Nielsen has extensive experience in the finance and shipping business, having
worked in Kvaerner Philadelphia Shipyard Inc., Aker American Shipping ASA, Kvaerner PLC, STX
Finland, Kvaerner Mandal AS, Hunsfos Fabrikker AS, and Elkem Fiska AS in various capacities
since 1990.
Mr. Nielsen holds an accounting degree from Agder Distriktshogskole, and MSc in Business
from Bodo Graduate School of Business in Norway, and an Executive MBA degree from Temple
University in USA.
Mr. Magne Haberg Executive Vice Mr. Haberg joined the Group in 2001 as a project manager at STX OSV Langsten, and
President, Sales & subsequently rose to senior vice president in sales and marketing in 2004.
Marketing
Mr. Haberg previously served as a subsea and hydraulic engineer, and a technical chief engineer
assistant at Smedvik Drilling AS, and an engineer and mechanic at Wilh Wilhelmsen ASA. Mr.
Haberg received a Diploma in Engineering from the Alesund Maritime College, and was a Chief
Engineer at the Alesund Maritime College in Alesund, Norway.
Mr. Stig Bjorkedal Executive Vice Mr. Bjorkedal joined the Company in 2006, having been vice president of Deck Machinery in
President, Business Rolls Royce Marine AS in Brattvaag.
Development &
Strategy Mr. Bjorkedal holds a Bachelor’s degree in Naval Architecture from University of More og
Romsdal in Alesund, Norway, and a Master of Management degree from BI Executive School in
Oslo, Norway.
Mr. Knut Ola Executive Vice Mr Tverdal joined the Group in 2000, and is also the yard director at STX's Aukra yard in
Tverdal President, Strategy Norway, and oversees operations in the yard in Vung Tau, Vietnam, and the yard in Niteroi,
Implementation Brazil. He was previously the VP of production at Kvaerner Philadelphia Shipyard from 2003 to
2005, and prior to that he worked at STX OSV from 2000 to 2003.
Mr. Tverdal holds a Master of Science degree from the Norwegian University of Science and
Technology in Trondheim.
Mr. Magne O. Executive Vice Mr. Bakke is head of the shipyard operations at STX OSV, overseeing STX's Norway and
Bakke President & Chief Romania operations. Prior to that, he served as the director the STX's Soviknes yard from 2005
Operating Officer to 2009. Mr Bakke has extensive experience in procurement, engineering and project
management in offshore field development projects, having joined the Group in 1984.
Mr. Bakke has a BSc in Civil Engineering degree from More og Romsdal State College of
Engineering in Alesund, Norway and a BSc in Marine Technology degree from the Aust-Agder
State College of Engineering in Norway.
Source: STX OSV
Page 30
Company Focus
STX OSV Holdings Limited
Island Frontier Well 2004 Island First vessel built to the class notation "Well Intervention" - designed for
intervention Offshore operations previously performed by drilling units.
vessel
Skandi Arctic Diving support 2009 DOF A diving support vessel with a completely new type of facilities based on a
vessel computer-based dive control system used to support a 24-man diving
chamber complex, which is believed to provide an improved work
environment for the divers.
Normand AHTS 2010 Solstad An AHTS with a 24m wide extreme beam, providing significantly improved
Prosper Offshore stability in anchor handling operations in harsh seawater conditions compared
to many other AHTSes with beam widths typically less than 20m. It is also
believed to be one of the most powerful AHTSes built at the time with
approximately 32,500 BHP and a bollard pull of nearly 350 tons.
TBN PSV 2011 DOF Scheduled to be delivered in 2011, this will be the first LNG-powered PSV
(Yard No. 738) equipped with STX OSV's new LNG storage solution whereby LNG storage is
located outside the cargo area, allowing more cargo tank capacities for
commercial operations.
Source: STX OSV, DBS Vickers
3) Industry awards
STX OSV has won “Ship of the Year” award 6 times in the last 10 years
Year awarded Vessel name Vessel type Owner
2000 Glutra Gas powered car and passenger ferry More & Romsdal Fylkesbater
2002 KV Svalbard Coast guard vessel Royal Norwegian Navy Material Command
2008 Island Wellserver Subsea riserless well intervention vessel Island Offshore
2009 Far Samson Multifunctional plough tug supply subsea Farstad Shipping
service vessel
Page 31
Company Focus
STX OSV Holdings Limited
8-Apr-11 Multi role MRV 05 3500 DWT Internal (STX 1 220.0 DOF ASA 2H2012 Aukra, Norway;
vessel ROV (approx) OSV Design) hull to be
delivered from
STX OSV's
Romania yard
8-Apr-11 Multi role MRV 05 3500 DWT Internal (STX 1 220.0 DOF ASA 2H2012 Brattvaag,
vessel SP (approx) OSV Design) Norway; Hull to
be delivered
from STX OSV's
yard in Romania
20-May-11 PSV PSV 08 4000 dwt Internal (STX 1 300.0 Farstad Shipping 1H2013 STX Yard in
CD OSV Design) Tomrefjord,
Norway
(Langsten)
20-May-11 PSV PSV 08 4000 dwt Internal (STX 1 300.0 Farstad Shipping 1H2013 Vietnam
CD OSV Design)
NB: We did not include the 8 LPG carriers for Transpetro as the contracts have yet to be made effective, pending financing approval from
Brazil’s Merchant Marine Fund.
Page 32
Company Focus
STX OSV Holdings Limited
DBSV recommendations are based on Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10 to +15% total return over the next 12 months for small caps, -10 to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
DBS Vickers Research is available on the following electronic platforms: DBS Vickers (www.dbsvresearch.com); Thomson
(www.thomson.com/financial); Factset (www.factset.com); Reuters (www.rbr.reuters.com); Capital IQ (www.capitaliq.com) and Bloomberg
(DBSR GO). For access, please contact your DBSV salesperson.
GENERAL DISCLOSURE/DISCLAIMER
This report is published by DBS Vickers Research (Singapore) Pte Ltd ("DBSVR"), a direct wholly-owned subsidiary of DBS Vickers Securities
(Singapore) Pte Ltd ("DBSVS") and an indirect wholly-owned subsidiary of DBS Vickers Securities Holdings Pte Ltd ("DBSVH"). This report is
intended for clients of DBSV Group only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means
or (ii) redistributed without the prior written consent of DBSVR.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to
DBSVR, DBSVS, and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed
are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does
not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for
the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain
separate independent legal or financial advice. DBSVR accepts no liability whatsoever for any direct, indirect and/or consequential loss (including
any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this
document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned
subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have
interests in the securities mentioned in this document. DBSVR, DBSVS, DBS Bank Ltd and their associates, their directors, and/or employees may
have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment
banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there
can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or
condensed and it may not contain all material information concerning the company (or companies) referred to in this report.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from
actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO
BE RELIED UPON as a representation and/or warranty by DBSVR, DBSVS and/or DBSVH (and/or any persons associated with the aforesaid
entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to
the commodity referred to in this report.
DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research
department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US
persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any
security discussed in this document should contact DBSVUSA exclusively.
ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies
and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her
compensation as, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 23 May 2011,
the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities
recommended in this report (“interest” includes direct or indirect ownership of securities, directorships and trustee positions).
Page 33
Company Focus
STX OSV Holdings Limited
RESTRICTIONS ON DISTRIBUTION
General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction where such distribution, publication,
availability or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBSVR and DBSVS, which are exempted from the requirement to
hold an Australian financial services licence under the Corporation Act 2001 [“CA] in respect of financial services
provided to the recipients. DBSVR and DBSVS are regulated by the Monetary Authority of Singapore [“MAS”]
under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for
“wholesale investors” within the meaning of the CA.
Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated
by the Hong Kong Securities and Futures Commission.
Singapore This report is being distributed in Singapore by DBSVR, which holds a Financial Adviser’s licence and is regulated by
the MAS. This report may additionally be distributed in Singapore by DBSVS (Company Regn. No. 198600294G),
which is an Exempt Financial Adviser as defined under the Financial Advisers Act. Any research report produced by
a foreign DBS Vickers entity, analyst or affiliate is distributed in Singapore only to “Institutional Investors”, “Expert
Investors” or “Accredited Investors” as defined in the Securities and Futures Act, Chap. 289 of Singapore. Any
distribution of research reports published by a foreign-related corporation of DBSVR/DBSVS to “Accredited
Investors” is provided pursuant to the approval by MAS of research distribution arrangements under Paragraph 11
of the First Schedule to the FAA.
United Kingdom This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the
meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority. Research
distributed in the UK is intended only for institutional clients.
rd
Dubai/ This report is being distributed in Dubai/United Arab Emirates by DBS Bank Ltd, Dubai (PO Box 506538, 3 Floor,
United Arab Emirates Building 3, Gate Precinct, DIFC, Dubai, United Arab Emirates) and is intended only for clients who meet the DFSA
regulatory criteria to be a Professional Client. It should not be relied upon by or distributed to Retail Clients. DBS
Bank Ltd, Dubai is regulated by the Dubai Financial Services Authority.
United States Neither this report nor any copy hereof may be taken or distributed into the United States or to any U.S. person
except in compliance with any applicable U.S. laws and regulations.
Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for
qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such
jurisdictions.
DBS Vickers Research (Singapore) Pte Ltd – 8 Cross Street, #02-01 PWC Building, Singapore 048424
Tel. 65-6533 9688
Company Regn. No. 198600295W
Page 34