February 6, 2012

STX OSV

OCBC on 6 Feb 2012

STX OSV specializes in the design and construction of complex and highly customized vessels used in the most challenging and difficult offshore environment. Its strong design and manufacturing capabilities, coupled with an advanced level of integration, allows it to stay nimble against the cost competition from Asian shipyards. The group enjoys a natural advantage from its operational headquarters in western Norway, which remains at the forefront of offshore developments for the foreseeable future. Initiate with BUY and a fair value estimate of S$1.65 (based on 9.7x FY12F EPS).

Focus on the high-end segment. Unlike Asian shipyards, which mainly construct vessels of higher standardization and less sophistication, STX OSV focuses on building technologically advanced and highly customized offshore vessels. In other words, STX OSV competes on design quality and manufacturing flexibility, while Asian shipyards compete primarily on costs and production volume. Given the general oversupply of OSVs in the market and an uncertain global outlook, we think that STX OSV is well-positioned both for growth and to weather any storm.

Strong design and manufacturing capabilities. STX OSV is known for its ability to design and construct innovative and market-tailored OSVs. The group employs some of the best designers and engineers, who work closely with customers to come up with innovative design solutions. Its flexible manufacturing process enables customization and allows for close collaboration between design and production, helping reduce manufacturing times and errors. Asian shipyards may be able to replicate certain work processes and engineering designs, but such advanced level of integration between its design and manufacture processes cannot be easily achieved.

Access to a critical mass of offshore players. STX OSV’s operational headquarters, in the western coast of Norway, offers several key advantages. First, the marine cluster in Norway reflects demand for advanced vessels required for the harsh North Seas environment and supports offshore research and development. Second, it provides access to the top designers and engineers in the industry. Third, synergistic interactions between owners, shipyards and equipment manufacturers help STX OSV identify opportunities quickly and develop prototypes ahead of competition.

BUY with S$1.65 fair value. The shares of major global offshore yards and local midcap offshore players are trading at 10x and 9.4x FY12F EPS respectively. For STX OSV, we feel that 9.7x FY12F EPS would be appropriate given its meaningful order backlog and good execution record. Initiate with a BUY with fair value estimate of S$1.65. 

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