The first time that I came into direct contact with Vallianz Holdings (“Vallianz”) was in early Aug 2014 where Mr Ling Yong Wah, Executive Director of Vallianz did a presentation at CIMB Securities. My first impression of him was pretty positive as he went to great lengths to explain his company’s business and prospects. He was also candid and shared with us some of the potential investors’ concerns about his company. A week later, I met him on a 1-1 chat over coffee on his company to understand more about the company and also to clarify some of my queries.
Vallianz has fallen approximately 32% from its intraday high of $0.135 on 22 Aug 2014 to $0.092 on 13
Oct 2014. With the sharp decline in its share price, it seems to be time to take a closer look in this stock.
Oct 2014. With the sharp decline in its share price, it seems to be time to take a closer look in this stock.
Description
Vallianz is a provider of offshore support vessels (“OSV”) and integrated offshore marine solutions to the oil and gas industry. They own a young fleet of over 29 offshore support vessels with an average fleet age of 2.3 years. Their fleet comprises of 19 anchor handling tugs (“AHTs”), six platform supply vessels (“PSVs”), two towing tugs and two other vessels. They cover markets in Asia Pacific, the Middle East and Latin America with their headquarters in Singapore.
Vallianz is listed on the SGX Catalist with a market capitalization of S$281m as of 13 Oct 2014. Please
visit their website http://www.vallianzholdings.com/corporate-profile.html# for more information.
visit their website http://www.vallianzholdings.com/corporate-profile.html# for more information.
Investment merits
Industry dynamics seem positive
Industry dynamics seem positive for Vallianz. Firstly, amid the delivery of new rigs in 2014 & 2015, the supply of rigs is expected to increase. This is likely to underpin demand for OSVs. Based on Figure 1 below, the OSV – rig ratio is likely to decline to 4.25x in 2015 (lower than that of 2013) and may decline to below 4x beyond 2015.
Figure 1: OSV – rig ratio
Secondly, according to Tidewater and Gulfmark, customers are placing more emphasis on younger vessels as these vessels typically have higher specifications such as dynamic positioning technology and better fuel efficiency. Based on Figure 2 below, more than 25% of the OSV fleet is more than 25 years old and likely to be less competitive vis-à-vis OSV owners with younger fleet. It is noteworthy that the average age of Vallianz’s fleet is about 2.3 years old. This compares favourably with the global average of about 11 years for AHTS and 18 years for PSVs. Furthermore, according to Vallianz, 17 out of 19 of their AHTs and all their six PSVs have dynamic positioning technology, which is increasing a pre-requisite for most offshore projects.
Figure 2: Age of OSV fleet
With reference to Figure 2 above and Figure 3 below, although there is an overbuilding of OSVs prior to 2008 where the AHTs and PSVs order book to fleet soared above 30%, this ratio has dropped to an average 8% for AHTs and 27% for PSVs. It is noteworthy that all of Vallianz’s vessels are below 7,999 BHP where the order book to fleet ratio is around 5%.
Figure 3: AHTs order book to fleet ratio
Vallianz’s order book of US$494m stretches to 2018 provides visibility
As of 30 Jun 2014, Vallianz has an order book of US$494m and is tendering for projects valued at around US$1.2b. According to the company, around 50% of the order book is likely to be recognized in 2HFY14F and FY15F. (See Figure 4 below)
Figure 4: Vallianz’s order book
Source: Company
Vallianz has executed several noteworthy initiatives in 2014
Firstly, Vallianz announced on 12 Apr 2014 that they have entered into a collaboration arrangement with a first class Chinese shipyard to build Vallianz – designed vessels. Vallianz has the right of refusal for up to 200 vessels. This is a strategic step to manage their asset base and fleet renewal.
Secondly, Vallianz announced on 22 Sep 2014 that they were acquiring a Singapore incorporated Jetlee Shipbuilding and Engineering Pte Ltd so as to establish their own marine base for docking and maintenance operations. According to the company, this should result in cost savings and enhance operational efficiencies. The purchase of Jetlee would be settled by issuance of 143.3m Vallianz shares at an issue price of $0.138 per share. It is noteworthy that the issue price of $0.138 was at a 24% premium to Vallianz’s volume weighted average price (“VWAP”) of $0.1116 per share. The owners of Jetlee Group are industry veterans and comprise of Mr Chan Kwan Bian (co-founder of Labroy Marine), Mr Teo Guo Ping (previously working at Pan-United Corp) and Mr Ng Chee Keong (founder of Jetlee through a joint venture with Pan-United Marine Limited.) As the consideration will be entirely settled via Vallianz shares, priced at a significant premium to the current price (then), it is likely that the Jetlee owners are confident in Vallianz’s business and growth prospects.
Thirdly, Vallianz announced on 30 Sep 2014 that they are acquiring OER Holdings Pte Ltd, a provider of manpower services to the offshore industry for US$27.7m. OER Holdings’ 2013 earnings before interest, tax, depreciation and amortization (“EBITDA”) was around US$5.6m. Thus, it was priced at approximately 5x 2013 EBITDA. According to management, this acquisition not only brings an additional source of revenue and income but is likely to open doors to new customers and geographical market, especially in Asia. It is noteworthy that this acquisition would also be settled solely by the issuance of 250m shares at an issue price of $0.140 per share. This is at a 27% premium to Vallianz VWAP of $0.1101 per share which undermines OER Holdings’ confidence in Vallianz.
All of the above initiatives seem to be part of Vallianz strategic move to grow its business over the medium to long term.
As with any company, there are noteworthy points to consider
Risks
Possibility of a delay in fleet expansion
As of 30 Jun 2014, Vallianz plans to increase their fleet by 72% to 50 vessels by end 2016. Their
current vessels are built by 3rd party shipyards. Any delay by the shipyards to deliver the vessels to Vallianz may have an adverse impact on Vallianz.
current vessels are built by 3rd party shipyards. Any delay by the shipyards to deliver the vessels to Vallianz may have an adverse impact on Vallianz.
Contracts cancellation is possible in dire circumstances
Some investors fear that if the oil prices continue its decline, charter contracts may be cancelled. Despite
Vallianz’s long term charter contracts, their customers are allowed to give a one month notice to Vallianz before they cancel their charter contracts. However, this practice is an industry norm for all players. A noteworthy point to note is that Vallianz’s vessels operate in shallow water, hence oil price may have to tumble below US$40 before their customers decide it is not worthwhile to continue drilling for oil.
Vallianz’s long term charter contracts, their customers are allowed to give a one month notice to Vallianz before they cancel their charter contracts. However, this practice is an industry norm for all players. A noteworthy point to note is that Vallianz’s vessels operate in shallow water, hence oil price may have to tumble below US$40 before their customers decide it is not worthwhile to continue drilling for oil.
Order book replenishment
Since the company’s announcement on 12 Apr 2014 that they were bidding for US$1.2b worth of contracts, they have only announced one Latin America contract worth US$82m on 15 May 2014. I understand from management that the contract award for some of their contracts is typically in 4Q which may explain the hiatus in the contracts being awarded.
Significant gearing is a sticky point for most investors
As of 30 Jun 2014, short term and long term totaled US$508m. This is significant vs. its total equity of US$169m. Vallianz’s loans are mainly USD denominated with floating rate obligations. This naturally brings up two issues especially with the strengthening USD and talk of rising interest rate environment.
According to management, although its loans are mainly USD denominated, its assets are also USD denominated. Furthermore, both earnings and expenses are USD denominated hence there is a natural hedge to a certain extent. It reports results in USD terms too. Thus, an appreciating USD is likely to have an overall muted impact on Vallianz.
As a corollary of its large debt obligations, Vallianz, in their 1HFY14 results, posted finance costs of around US$7.5m. This is significant as compared to its 1HFY14 net profit of around US$10.1m. It is logical that if interest rate rises in the next 1-3 years, (assuming that Vallianz’s debt quantum remains unchanged), its finance costs will rise further. However, if all the above initiatives and Vallianz’s confidence in securing contracts bear fruit, Vallianz earnings and cash flow should improve over time.
Chart outlook – All time oversold
Based on Chart 1 below, Vallianz has fallen approximately 32% from its intraday high of $0.135 on 22
Aug 2014 to $0.092 on 10 Oct 2014. Both Pacific Radiance and POSH have also dropped 26% and 28% respectively during the period. Thus, the sharp drop in Vallianz may be due largely to the weakened sentiment in the OSV operators.
Aug 2014 to $0.092 on 10 Oct 2014. Both Pacific Radiance and POSH have also dropped 26% and 28% respectively during the period. Thus, the sharp drop in Vallianz may be due largely to the weakened sentiment in the OSV operators.
Based on today’s close, Vallianz seems to have formed a *doji which may potentially be the start of a reversal. RSI closed at 14.6 last Fri. This is the lowest level since its trading history dating back to May 2001. The extreme oversold pressures are likely to limit any near term decline. Support is likely around $0.088 with strong support at around $0.085. Resistance is at $0.099 / 0.108 / 0.115.
*For doji to form, it is ideal but not necessary for the open and close to be the same price. In my opinion (chart interpretation is subjective), the candlestick formed on 13 Oct seems to fulfil a doji’s requirements.
Chart 1: Vallianz – all time oversold
Source: CIMB itrade as of 13 Oct 2014
Conclusion – This is just an introduction
In a nutshell, Vallianz seems to be in the right industry with bright prospects and they have executed several initiatives in 2014. If these are executed well, it should pave the way for continual growth in the medium to long term. However, it is noteworthy that contract replenishment, significant U.S. debt and finance costs, etc are some factors which readers should be aware of. If Vallianz continues to deliver on their earnings, contracts and their plans, it is likely that they may re-rate over time.
Readers who are interested should take a look at their website http://www.vallianzholdings.com/corporate-profile.html# for more information. You can also email me at crclk@yahoo.com.sg for the unrated analyst report on Vallianz (there is no rated report on Vallianz) and the informative industry reports. As I am not able to put in the above figures and chart, you can also drop me a note and I will forward a pdf writeup to you.
Disclaimer
The information contained herein is the writer’s personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.
Hi Ernest,
Well written report! Kudos to you. I am vested in Vallianz since 2010.
Rolf Suey
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