Fairstar Heavy Transport (FAIR.OSE)

Transcription

1 Fairstar Heavy Transport (FAIR.OSE) Industry: Energy Equipment & Services. Share price: 8.90 NOK per share. Target price: NOK per share, BUY (102.4% upside). Analyst Andreas Olsen Glasgow, 25 th of November 2009 Executive summary Fairstar Heavy Transport is a provider of long-distance ocean transportation services for the offshore and onshore energy industries, focusing on field development. Having the youngest and most modern fleet, Fairstar is able to transport complex structures and modules, resulting in higher day rates. Trading at unjustified discounts to its peers, could this mispricing be a combination of low analyst coverage and market capitalization? P/B of 1.0, estimated revenue growth for 2009 of 185% and a potential upside of 102.4% sheds light on this theory. Contract expectations from the Gorgon field are important triggers for the next year. My estimates imply a fair value of NOK per share. Both vessels received contracts before they were in the water. Open-stern vessels as Fairstar s receive the highest day rates in the sector. Low break-even day rate at USD Shift in focus to field development from rig transportation, the latter being a very tight market, experiencing severe discounting on day rates. No conversion risk as both vessels now are operative. Strong demand for heavy transport services from the large Gorgon field on the coast of Australia and 120 other expected offshore projects from 2011 and forth. Solid cash flow in the years to come together with solid margins and low gearing. A clear takeover-candidate in an industry screaming for consolidation combined with two major shareholders holding over 20% each. According to peer multiples, the company should be trading at NOK per share. Target price at NOK per share, indicating a 102.4% upside. Key figures E E 2011E 2012E 2013E 2014E Net interest bearing debt (cash) MNOK Market capitalization " Enterprise value " EPS NOK (1.6) FCF per share " (5.8) Net Profit margin " -49 % 24 % 23 % 29 % 29 % 30 % 28 % EBITDA margin " -1 % 49 % 49 % 49 % 50 % 50 % 49 % EBIT margin " -21 % 33 % 31 % 33 % 33 % 33 % 31 % ROE " 2 % 15 % 12 % 13 % 12 % 11 % 9 % ROA " 1 % 6 % 5 % 7 % 7 % 7 % 6 % Debt ratio " 55 % 39 % 32 % 27 % 22 % 19 % 15 % Debt/Equity " 286 % 155 % 112 % 93 % 77 % 62 % 49 % Pricing Multiples E E 2011E 2012E 2013E 2014E P/E neg P/B EV/EBITDA neg EV/EBIT neg

2 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Company profile Fairstar Heavy Transport is a provider of long-distance ocean transportation services for the offshore and onshore energy industries, focusing on high value floating and non-floating cargoes. The main focus is on field development modules, but the vessels are capable of transporting offshore drilling rigs, semi submersible rigs, FPV s, cranes and military vessels. The Rotterdam-based company was incorporated in July Two months later, the company took delivery of two semi-submersible barges from BOA Offshore in Trondheim. These two barges, amongst the world s largest semi-submersibles, were converted to self-propelled heavy transport vessels and renamed Fjord and Fjell. Fjord has been in operation since the end of March 2008, while Fjell entered operations in May The CEO, Philip Adkins, has extensive global experience in corporate finance from Citigroup and successful turnarounds. The company s largest shareholder is Louis Dreyfus Offshore with 24.97% of all outstanding shares. Financials Initial capex was funded by two private placements, one bond issue and a loan agreement with HSH- Nordbank. The total capex of $175 mill. consisted of $95 mill. for Fjord and $80 mill. for Fjell. $50 mill. in a private placement upon incorporation. $13 mill. in a private placement at the end of Q MKr. bond issue at the start of Q (final repayment in March 1010). $81 mill. loan agreement with HSH-Nordbank, including an overdraft facility of $9 mill. for working capital purposes. $9.5 mill. in a private placement in Q combined with a $15 mill. four year facility with Fortis in order to redeem the 124 MKr. bond loan. The company is well within the restraints covered by the loan covenants. Since heavy lift transportation clients normally pay 50% of the contract value up-front and the remaining 50% upon delivery, the company will have negative working capital. Since the company has no cash holdings left, it is financing operations from up-front payments and the overdraft facility. However, this is not critical as I assume the company to have a positive net cash flow of $3.5 mill. in fourth quarter. According to my estimates, Fairstar will have a break-even day rate at approximately $ when assuming as base year. $ % $ $ $ % 75 % 70 % 65 % $ % Day rate As it stands, the company is fully financed and there are no major investments expected in the years ahead. Future capex relates to maintenance and upgrades, but this is estimated at relatively low cost ($1 mill. per unit) as these vessels are amongst the newest on the market. The debt maturity profile looks unproblematic with $6.4 mill in annual repayments (excluding bond repayment). 2 Utilization

3 Fleet The fleet consists of two vessels; Fjord and Fjell. Both vessels were built at Jinling Shipyard in 2000 and converted at Malta Shipyards after significant delays. Fjord was delivered in Q1 2008, while Fjell was delivered in May Fjord Fjell Dimensions 146 x 45 x 9m 146 x 36 x 9 m Deadweight tonn tonn One of the advantages is that both vessels have an open stern configuration (Dockwise has five while Cosco has two), implying that they can carry unconventional structures by on- and offloading the cargo over the stern. This will fit in with the company s strategy to focus on field development which often involves the transport of complex structures and modules. In addition, the more sophisticated open-stern vessels generate higher day rates than tanker-shaped and dock-type vessels. Fairstar has a significant younger fleet than both Offshore Heavy Transport and Dockwise. There are several advantages connected to this. First, there will be less upgrades and repairs than would be the case with an old unit. Second, there will be reduced operational risk for new units compared to old units who may easily experience problems while at sea. Market Supply There are not many competitors in the heavy transport segment. The market is dominated by Dockwise with its 15 vessels (excluding yacht transport). OHT, the recent acquisition of Spencer Energy, has four vessels while the Chinese conglomerate, Cosco, has two vessels in operation and two under construction. The total market fleet consists of 24 vessels today and 26 in Heavy transport vessels are mostly exposed to the transportation of jack-up and semi submersible rigs. Over the past six months, we have seen severe discounts in day rates as a consequence of decrease in demand for transport. However, Fairstar is now focusing on field development rather than rig mobilisation. Since this market involves long-term business rather than spot contracts, Fairstar will obtain more predictable cash flows and a much higher (and needed) visibility for the coming years. Spot markets are convenient for companies with big fleets, but for a fleet with only two vessels it will be extremely difficult to be in the right place at the right time. Demand The field development market consists of large, longterm projects in the start face of an industry lifecycle. A significant part of the on- and offshore installations are constructed in Asia, and these large sections need to be transported to their final destination with heavy transport vessels. The current oil price levels and the revival of contracting activity offshore contribute to increased demand for transport services # Offshore Projects (Infinancials) The IEA predicts demand for natural gas, the cleanest burning fossil fuel, to grow by more than 67% by LNG projects in Australia have been less affected by 0 the economic downturn than other segments. These projects are needed to help meet the demand for LNG supplies in Asia. Several players in the industry expect that a number of LNG projects will commence between 2012 and

4 Source: Google One development area I have high expectations to is the gigantic Gorgon field outside the coast of Australia, a joint venture between Chevron, ExxonMobil and Shell. This field is estimated to contain 40 trillion cubic feet LNG, enough to power a city of 1 million people for 800 years. The Gordon field, with a lifetime of 40 years, will require large infrastructure and LNG modules. Since most heavy transport services for LNG projects are executed at least two years prior to execution, we could expect business opportunities from Gorgon already in Fairstar has experience in transporting LNG modules for Chevron from February Peer comparison EV/EBITDA EV/EBIT P/E EV MCAP 2009E E 2011E 2009E E 2011E 2009E E 2011E MNOK MNOK Fairstar Peers* Cosco n/a n/a Dockwise Average Premium (discount) % % % % % % % % % (Source: Infinancials) Since Fjell entered operations in May 2009, I will use as base year. Fairstar trades at a discount to all E multiples. This discount can be the consequence of Fairstar being a very young company with limited track record. Both Cosco and Dockwise have established client relations for a long time as well as having larger fleets. On the flipside, Fairstar has a younger and more modern fleet (lower maintenance cost), while Dockwise s average vessel age is 19 years. Fairstar is also aiming towards a new market with long-term contracts which should provide a more predictable cash flow. These multiples are likely to improve as the company will use free cash flow to repay debt in the short term. A fragmented transport market would experience clear synergies through consolidation: (1) Increased ability to serve the spot market, (2) fleet diversification in terms of vessel type and age, (3) increased day rates as a result of less competition and (4) cost reductions in administration and technological development. Risk factors As the company has only two vessels, fleet utilization will be highly sensitive to utilization of the two individual units. Since the company is a relative new player in the heavy lift market, Fairstar has a very short track record and possibly fewer established relations than its peers. Cancellation or postponing of confirmed contracts will affect utilization, earnings, solvency and valuation. Fluctuations in the foreign exchange market for USDNOK will affect both the 124 MKr. bond and share price. The fifth risk factor is the possibility of reduction in day rates. However, the company s business model will allow day rates as low as $ to break-even. Since the company operates vessels, there is an inherent technical risk related to unanticipated technical issues during operations which may cause unplanned off-hire periods. As Heavy lift vessels have limited alternative use, a reduction in demand will affect earnings. Liquidity risk in the share as a result of low trading volumes. Transportation delays or damage of goods during transport may hurt the company s reputation. 4

5 Valuation DISCOUNTED CASH FLOW NET ASSET VALUE Total NPV USDm Vessels (Q3 Balance Sheet) USDm Net debt Y/E " 62.5 Net debt Y/E " 62.5 Equity value " Equity value " # shares MILL 43.9 # shares MILL 43.9 USDNOK 5.6 USDNOK 5.6 DCF per share NOK 17.9 NAV per share NOK ,9 24,1 21,6 21,2 17,9 15,1 18,0 8,9 EV/EBITDA EV/EBIT P/E AVERAGE DCF NAV FAIR VALUE SHARE PRICE Sensitivity to USDNOK Sensitivity to WACC % 7.0 % 8.0 % 8.2 % 9.0 % 10.0 % 11.0 % Fair value Fair value Income Statement E E 2011E 2012E 2013E 2014E Revenues USDm Vessel cost " (5.6) (14.8) (12.9) (13.9) (14.2) (13.7) (12.4) Time-charter equivalent " OPEX " (5.0) (6.7) (5.7) (6.0) (6.1) (5.7) (5.4) SG&A " (5.3) (1.5) (1.5) (1.5) (1.5) (1.5) (1.5) EBITDA " (0.2) Depreciation " (3.0) (6.9) (6.9) (6.9) (6.9) (6.9) (6.9) EBIT " (3.2) Net financials " (4.5) (4.3) (3.0) (1.8) (1.9) (1.4) (0.9) Pretax profit " (7.7) Tax " Net profit " (7.7) Balance Sheet E E 2011E 2012E 2013E 2014E PP&E USDm Total non-current assets " Other current assets " Cash and equivalents " Total current assets " Total assets " Shareholder's equity " Total equity " LT interest bearing debt " Total non-current liabilities " ST interest bearing debt " Other current liabilities " Total current liabilities " Total liabilities " Total equity and liabilities "