Vallianz Holdings Limited - CIMB Research 2016-07-04: Smooth sailing in the Middle East

VALLIANZ HOLDINGS LIMITED 545.SI

Vallianz Holdings Limited - Smooth sailing in the Middle East

Earnings visibility from charter backlog of c.US$1.2bn, mostly to national oil companies in the Middle East, with utilisation of 80-90% vs. 50-60% in Asia Pacific.
Potential further contract wins from Saudi Aramco by leveraging partner Rawabi Holding’s firm relationship with the national oil company (NOC).
Sharp fall in net gearing from the highs of 2-3x to 0.7x.

We initiate coverage at Add with a target price of S$0.07, based on 0.8x FY16F P/BV, in line with ROE of 8-9% in FY16-18F. Re-rating catalysts include greater contract wins.

Unlike peers who are enduring deteriorating earnings from weak demand, Vallianz offers earnings visibility until 2025, backed by a charter backlog of c.US$1.2bn. Most of the contracts are 5-7 years, serving national oil companies in the Middle East.
We project core earnings of US$23m in FY16, US$30m in FY17 and US$32m in FY18, driven by steady revenues of US$248m, US$265m and US$276m, respectively, as we estimate utilisation is secured at c.80-90% vs. 50-60% in Asia Pacific.

Vallianz has been able to secure long-term contracts from Saudi Aramco because its strategic partner, Rawabi Holding, has a firm relationship with Aramco.
The recent award of an entire tender worth US$210m to deploy 13 OSVs for up to 7 years is a case in point. Vallianz is the second-largest OSV supplier to Aramco. We estimate that the company enjoys c.14% market share in the Middle East.
By leveraging on Rawabi’s presence and relationship, Vallianz is strategically positioned for more contract wins.

High net gearing has been a key overhang. As of 1Q16, net gearing has fallen to 0.7x from the highs of 2-3x.
We expect further reduction in net gearing to 0.4x in FY16F as
1. a S$100m Series 1 note (US$74m) was redeemed in Apr,
2. we estimate S$60m Series 2 note (US$44m) to be redeemed in Nov by issuing new shares, increasing the equity base and lowering debt.

We project FY16-18F EPS growing at a 21% CAGR. driven by
1. stable revenue from longterm charter and
2. lower interest expense, mainly due to interest savings from redemption of notes.
We have assumed larger share base from share issuance from private placement to redeem upcoming notes, factoring a potential dilution of c.25%.

We initiate coverage on Vallianz with an Add recommendation and target price of S$0.07, based on 0.8x FY16F P/BV, in line with 8-9% ROE in FY16-18F.
We believe that valuations are undemanding, as the stock currently trades at an implied CY16 P/E of 4.7x and FY16 P/BV of 0.4x, supported by stable earnings from long-term contracts and a falling net gearing.
Re-rating catalysts include greater contract wins. Downside risks include a reduction in charter rates by Saudi Aramco.

LIM Siew Khee CIMB Securities | http://research.itradecimb.com/ 2016-07-04

CIMB Securities SGX Stock Analyst Report ADD Initiate ADD 0.07 Same 0.07