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.
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
Oct 2014. Please
visit their website http://www.vallianzholdings.com/corporate-profile.html#
for more information.
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
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
Vallianz has executed several noteworthy initiatives in 2014
Firstly, Vallianz announced on
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
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. Singapore
Thirdly, Vallianz announced on
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
Possibility of a delay in fleet expansion
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
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.
Order book replenishment
Since the company’s announcement on
that they were bidding for US$1.2b worth of contracts, they have only announced
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
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
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
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 firstname.lastname@example.org 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.
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