STX OSV Holdings - Down but not out (DBSVickers)

BUY S$1.21 STI : 2,791.79

Price Target : 12-Month S$ 1.54 (Prev S$ 1.90)

Reason for Report : Reduction in earnings forecasts, TP

Potential Catalyst: Order wins

DBSV vs Consensus: Below on lower order win assumptions

• Fundamentals intact despite recent sell-down; STX OSV is well positioned to leverage on the newbuild cycle

• Order flow momentum hit by macro uncertainties and protracted contracting process

• FY11-13 order wins lowered by 17-19% on slow YTD order flow YTD; FY12/13F earnings cut by 4-10%

• BUY, TP lowered to S$1.54

Longer term fundamentals intact; STX OSV well positioned. Despite the recent sell down, STX OSV remains well positioned to benefit from a recovery in the newbuild cycle. In our view, the drivers supporting a recovery in demand for newbuild OSVs remain intact, with our latest background checks indicating that enquiry levels remain healthy, with a stable pipeline of potential orders.

Order momentum hit by macro uncertainties. However, in the near term, the ongoing economic uncertainty and skittish capital markets continue to cloud visibility on the timing of orders. Our industry checks reveal a generally more protracted process in finalizing an order. With ~3 months of 2011 left and only NOK5bn of orders in the bag, our view for a stronger 2H 2011 for order wins seem increasingly unlikely.

FY11-13 order wins assumptions trimmed. As such, we have trimmed our FY11-13 order wins assumptions by 17-19% on possible order deferments, leading to a 4%/10% cut in our FY12/13F. We highlight that 48% of our revised FY11 order wins assumption is backed by secured orders, rising to 80% once the Transpetro and Island Offshore orders are made effective.

TP trimmed to S$1.54; maintain BUY. Our TP for STX OSV is adjusted to S$1.54 (prev S$1.90) on a reduced FY12F and lower target PE of 9x (prev 11x) on FY12F. At 5.7x/7.0x FY11/12 PE, valuations are undemanding, supported by strong quarterly results expected over the near term and sustained solid project execution. Maintain BUY on STX OSV for its market dominance in complex and highly customized AHTS and PSVs, solid execution and track record.