STX OSV Holdings Limited: The whole nine yards

- Initiate with Outperform and target price of S$1.60, based on 11x CY12 P/E (10% discount to 5-year rigbuilders' mean). STX OSV is a designer and shipbuilder of high-end, customised offshore support vessels. With nine shipyards in four countries, it has exposure to global E&P spending. We see stock catalysts from higher-than-expected orders and results.

- League above local OSV yards. With better capabilities, stronger earnings growth and visibility, and a quality order book, we place STX OSV in a league above the rest of the local OSV builders.

- Booming Brazil. STX OSV has a 45% market share, in terms of the number of OSVs under construction in Brazil. It currently has a second yard under development in Brazil (operational in 2012/13) to tap Petrobras' E&P ambitions. We project a 3-year earnings CAGR of 34% on better execution and the recovery in the OSV sub-sector.

- Valuation-competency mismatch. The stock is trading at 8x CY12 P/E, in line with local OSV builders' 5-year trading average. We argue that closer comparables should be rigbuilders, KepCorp and SMM, which are trading above their 5-year P/E mean valuations. We believe that STX OSV, as the only other mid-cap investment apart from Ezra, is the next most-valued proxy for the global E&P recovery.

Background
Major global shipbuilder of offshore support vessels (OSVs). STX OSV is a designer and shipbuilder of high-end, customised OSVs, comprising anchor handling tug supply vessels (AHTS), platform supply vessels (PSV) and offshore subsea construction vessels (OSCV). Depending on customers' specifications, it sometimes builds specialised vessels such as LNG-powered ferries, naval and coast guard vessels as well as non-offshore related icebreakers. STX OSV operates nine shipyards in four countries: five in Norway, two in Romania, one in Brazil and one in Vietnam. It also has a second shipyard under development in Brazil. The company is headquartered in Norway with a global headcount of 9,000. STX OSV has an extensive track record, having delivered more than 200 vessels since 2000.

STX OSV is a member of STX Group, a leading shipbuilding and shipping conglomerate based in Korea. Sister company, STX Pan Ocean (STX SP, Underperform, S$13.30) has been listed on the SGX since mid-2005. STX OSV was previously part of Aker Yards ASA, which was acquired by the STX Group in late 2008. According to Clarkson Research, STX Group's shipbuilding entities (STX Offshore & Shipbuilding, STX Dalian, STX Finland, STX France and STX OSV) are ranked among the top five shipbuilding groups globally by order book, measured in gross tonnage. Through the group, STX OSV is able to glean insights into shipping and shipbuilding trends. STX OSV is also able to enjoy economies of scale by procuring equipment and supplies as a group.

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