Following the weaker than expected 2Q11 results, we have cut our earnings estimates, largely driven by lower assumptions on EBITDA margins in Heavy Lift (2011: 35% margin vs. 41% previously; 2012: 40% vs. 48%; 2013: 42.5% vs. 50%). This results in EPS 2011: -48%; EPS 2012: -37%; and EPS 2013: -28%). The strong decline in EPS estimates is a reflection of the low earnings base and the high leverage of the business. In response, we lower our target price to € 16 (from € 21). We stick to our Hold rating.
Heavy Lift margins well below expectations in 2Q11:
The main surprise in 2Q11 was that Heavy Lift generated a 32.9% margincompared to our estimate of 40%. Its sales were 4% lower y/y but its EBITDA was 28% lower y/y, resulting in margin contraction of 10.8% y/y. According to management, pricing remains tough while fuel costs have risen. In addition, compared to 2Q10, the mixwas more geared to heavy marine transport. This is the segment in which competition is most fierce, partly due to (temporary?) entry of vessels from industry-outsiders, which puts pressure on pricing and frustrates utilization as these rivals are looking for return-cargo (West-East route), just like Dockwise. Sales and earnings in Yacht Transport were in line with expectations.
Backlog on the rise but pricing could remain soft until early 2012:
The backlog rose to a record € 471m, split 53%-47% between heavy marine transport and transport & installation. The backlog for 2H of € 101m is below the € 136m of last year. The backlog for FY+1 and FY+2, on the other hand, is much higher than last year. Obviously, pre-calculated margins were not disclosed but management indicated pricing will probably remain soft until early 2012. Consequently, we have cut our margin assumptions for 3Q11, 4Q11, and also for the years beyond, albeit still trending up. As the backlog continues to grow, supply should in due time become scarce, thus creating a potential trigger for price hikes. The current phase of the oil services cycle should result in many transports in the next two years, given the large amount of new rigs and production modules currently under construction. As such, risk associated with a potential economic slowdown relates largely to return cargoes, such as dredging equipment and port cranes.
Balance sheet stretched a little further in 2Q11:
Net debt/EBITDA rose to 2.82x from 2.65x at the end of 1Q11. Capex in 1H11 was € 49m, of which € 39m re the new type-0 vessel Vanguard, so maintenance capex was very low. Our new estimates point to net debt/EBITDA of 3.3x at year-end 2011, just below the threshold of 3.5x so there is not much room to manoeuvre. It is a pity that assets-under-construction are part of the debt side of the equation, as construction of the Vanguard has a significant impact at a maximum of $ 117m, shortly before completion (construction costs – funding through rights issue). This $ 117m represents 0.7x 2010 EBITDA and an estimated 0.8x 2011E EBITDA.