STX OSV Holdings - Transpetro contract finally made effective (DBSV)

BUY S$1.09 STI : 2,730.34

Price Target : 12-Month S$ 1.54

Transpetro contracts finally made effective. Over the weekend, STX OSV announced that the contract for 8 LPG carriers for Petrobras Transportes S.A. (Transpetro) has been made effective. Recall that these contracts were originally signed in July 2010, but have not been included in the orderbook. With the contract made effective, this will trigger first down payment and start of the construction and delivery schedule.

NOK3bn boost to orderbook. As a recap, total contract value is c. US$536m (NOK3bn). This will be for the construction of two different types of LPG carriers designed by Hamworthy: 1) fully pressurized LPG carriers – four units with cargo capacity of 7,000m3, two units with cargo capacity of 4,000m3; and 2) two units of semi-refrigerated LPG carriers with cargo capacity of 12,000m3.

Vessels to kick off operations at second Brazilian yard. The construction of these 8 vessels will kick off operations of STX OSV’s second Brazilian yard in Pernambuco, currently under development. Preparatory work for shipyard construction has commenced, with actual shipyard construction to begin by end 2011. While yard construction is expected to conclude in 1Q2014, shipbuilding projects are scheduled to be gradually ramped up from 2013.

91% of FY11 order wins assumption in the bag. This contract will boost the group’s FY11 YTD order wins to NOK8.6bn, forming 91% of our full year order wins assumption of NOK9.5bn. We estimate STX OSV’s orderbook now stands at NOK17.1bn, vs. NOK13.6bn as of end 3Q11, after including the Transpetro contract and the other 2 contracts secured in 4Q11 to date. Book-to-bill has been lifted to c. 1.5x from 1.2x previously.

Boost to longer term earnings visibility. As these vessels will be delivered over 2014-2016, near term impact to earnings is limited, with first revenue contribution expected only in 3Q13. However, this raises longer term earnings visibility, with an estimated 18% of FY13 revenue now backed by secured contracts from 15% previously.

Maintain BUY. No change to our numbers, as this contract was already in our forecasts. However, this removes an ongoing concern among investors over the repeated delays in the contract being made effective. Maintain BUY, TP unchanged at S$1.54.