STX OSV Holdings: STX Europe to cut down stake; news is positive (DMG)

(BUY, S$1.42, TP S$1.89)

Placement removes overhang risk; a stock to own. STX Europe, the major shareholder of STX OSV, has agreed to sell 215.6m of its shares (18.3% of total shares) to OZ Management (Och-Ziff) at S$1.33/share, 6.3% below its closing price. Post placement, STX Europe will remain as the major shareholder with a 50.75% stake and OZ Management will own 20.0% of STX OSV. We believe the overhang risk has been cleared by the placement and believe share price could continue to re-rate on improving demand for high-end newbuilds offshore support vessels (OSV). We re-iterate BUY with a TP of S$1.89 based on 11x FY11F P/E.

Placement to drive liquidity. Under the exercise, STX Europe will place 215.6m of its existing shares to Och-Ziff for S$1.33/share and this values the deal at S$286.7m. STX Europe also entered into an agreement with Och-Ziff and agreed not to dispose any shares until 12 Nov 2012. Och-Ziff is one of the largest alternative asset managers In the world with US$29.3b asset under management as of 1 Jul 2011. To recap, the news of the placement first surfaced in mid-April when various news channels reported that STX Europe is planning to sell 20% of its stake in May or Jun this year. Subsequently, on 26 April 2011, STX OSV came out with a statement with clarification that STX Europe is continuously exploring strategic options. We believe STX Europe wanted to selldown more of its own shares during the IPO in Nov 2010 but held back as the IPO price came in at the bottom of the range.

Valuation: TP maintained at S$1.89. Our TP is based on 11x FY11F P/E. We re-iterate our positive view on the stock: (1) STX OSV is well positioned in an upcycle for the high-end OSV market given its strong technical capabilities, relationship with leading vessel owners and global positioning; (2) We expect the company to gain more newbuild orders in 2H11 as enquiries for newbuilds have increased significantly in the past six months. Stock is now trading at 8x FY11 P/E with 3.9% net yield. Our TP implies 33% upside from its last closing price.