Kreuz: Initiation - Poised, But Not Priced, For Growth
(BUY, SGD0.76, TP: SGD1.14)
Kreuz (KRZ) is a fast-growing subsea services provider with very strong margins and highly visible medium-term growth as its capacity is set to more than double by FY16F. Given its very low 6% net gearing and strong cashflow, KRZ is attractively priced at 7.1x FY13F EPS and 19% growth. We initiate coverage with a BUY and SGD1.14 TP, based on 10x blended FY13F/14F EPS, and backed by a SGD2.05 DCF value.
30%/20% EBITDA/net margins. KRZ commands very high margins as subsea work is highly specialised. As demand for subsea work – buoyed by sustainable high oil prices – has exceeded the Group’s limited capacity, it is now cherry-picking contracts thereby supporting its margins.
New DSVs can triple FY16F earnings from FY12. Each diving support vessel (DSV) can contribute USD40m annually to KRZ’s bottomline (slightly exceeding FY12’s profit of USD39.7m). We expect a half-year contribution from one vessel in FY15 and full-year contributions from both units in FY16. We estimate the ROEs of these vessels at 99%, and at only 65% debt funding. Our channel checks indicate that the first DSV will be delivered six months ahead of schedule. Consensus has yet to factor in the positive earnings impact for FY15F.
Net gearing low even after funding DSVs. KRZ’s current net gearing is only 6%. Even after taking on debt to fund the two DSVs, priced at USD114m each, its highest net debt will hit only 20% in FY16F.
Strong cashflow boosts DCF to SGD2.05 per share. KRZ’s FY12 cashflow was strong at USD26.7m. We foresee this figure growing to USD34m-USD50m from FY13F-FY15F. The strong surge in income and cashflow from the two DSVs results in a DCF value of SGD2.05, based on an upward-biased WACC of 10.6%.
One of few remaining gems. Initiate coverage with BUY. KRZ, which delivered 49% earnings growth in FY12, is on track for 19% growth this year. This is an under-researched growth company trading at a 7.1x forward P/E and 5.1x EV/EBITDA. We see strong potential for KRZ’s share price to double within the next three years. Initiate with BUY and SGD1.14 TP, based on a 10x blended FY13F/14F EPS.
Publish date: 01/08/13