MER released a research report on 26 February, shortly after the company announced its earnings. MERmaintains its 12-month price target of $1.82  and an ‘Outperform’  rating on STX OSV. Some excerpts from the report are shown below.

Impact of earnings
Weak 4th quarter results impacted by one-offs:  NOK47m impairment charge was included in depreciation but management could not clarify, given the general offer period. Management commented that they faced operational issues on staff turnover in the new Brazil yard being built. Also, Norway and Vietnam saw lower utilization, which might not continue in MER’s view.

Investors will focus on full year EBITDA margins which were quite good:  2012 earnings before interest, tax, depreciation and amortization (EBITDA) margin came in at 13.2%. 2011 margins of 19.0% were exceptional and not the right comparison. Before 2011, STX OSV used to deliver 5-11% margins. Management had earlier guided for 10-13% margins.

A further decline in margins is built into MER’s estimates:  MER is building 12.6% and 12.3% EBITDA margin for 2013 and 2014, respectively.
Robust order book of NOK15.1bn Order inflows should improve in 2013: STX OSV ended 2012 with a robust order book providing revenue visibility for 1.5 years. 2013 has started well with 3 large orders worth NOK2bn received already.

MER is building 5-8% earnings growth annually for next 3 years:  Increase in order flows in 2013-14 should lead to 5-8% revenue growth, leading to profit growth in MER’s view. MER is not including synergies from the new parent.

MER’s action and recommendation
Stock will move on new orders Subsea and AHTS showing strength:  Offshore Subsea Construction Vessel market has been strong in the past six months. Management commented that the Anchor Handling Tug Supply market is finally showing good signs of recovery. MER expects STX OSV to win 25% more orders vs 2012 in 2013 (NOK 12bn).

Top pick in the space A deep value buy:  MER thinks the stock has a price floor of SG$1.22 currently (general offer by Fincantieri). At current price, the stock has a compelling risk/reward at ~7x 2013E price to earnings with ~5% div yield, strategic synergies and earnings per share enhancement along the road from new parent and an improvement in order inflows in 2013.

Source: Macquarie Research - 28 Feb 2013