Kreuz is the subject of a takeover offer by private equity fund SEA9 Pte Ltd  at  a  price  of  SGD0.80  per  share.  Unusually,  the  method  of acquisition  is  by  scheme  of  arrangement,  which  aims  to  bypass  a general offer. We believe that the offer price undervalues Kreuz,  given its long-term growth  potential.  Our recommendation to shareholders is DO  NOT  ACCEPT,  reiterating  our  SGD1.16  TP  and  DCF-value  of SGD2.25 per share.

• 31%  discount  to  TP,  64%  discount  to  DCF-value.  The  offer  price values  Kreuz  at  a  mere  7.4x  FY13F  P/E,  resulting  from  the  interplay between a weak seller and a strong buyer. The offer price implies a 31% discount from our 12-month TP, and a 64% discount from our DCF-value of the company at SGD2.25 per share, based on a 10.6% WACC.
• Kreuz  is  worth  SGD2.00+  in  FY15  and  beyond.  Factoring  in  the growth  from  the  diving  support  vessels  (DSVs)  sector,  we  believe  that Kreuz’  earnings  can  grow  to  USD69.4m  in  FY15F  and  USD92.2m  in FY16F  from  USD39.7m  in  FY12.  At  those  earnings,  its  shares  will  be worth  SGD2.07-2.61  at  the  same  10x  P/E.  SEA9  stands  to  achieve  a 226% return in three years by taking Kreuz private now and  potentially re-listing it later at an even higher multiple than at takeover.
• Swiber chooses jam now,  peanuts later.  Swiber (SWIB SP, NR) will recognise  a  USD90.6m  gain  upon  deal  completion.  However,  we  note that Kreuz accounted for 22-202% of the former’s earnings in the last six quarters, and 50% overall for FY12. Swiber is selling its crown jewel for a one-time gain at the expense of future growth and profitability.
• David vs Goliath with a different outcome.  In this case, the combined stakes of Swiber’s and Kreuz’ directors already stands at 73.69%, almost at the requisite 75% to achieve “shareholder approval”. The  scheme of arrangement  will  then  be  brought  to  court,  which  can  then  sanction  a compulsory acquisition of minority shareholders’ stakes. In this case, the minorities have little chance against the Goliath of the majority, and we expect the deal to go through. We do, however, stand by our valuations and recommend that investors DO NOT ACCEPT.

Additional Notes

Each DSV can bring in  c.USD40m annually, trebling Kreuz’  earnings in FY16F from  FY12.  Kreuz  has  ordered  one  DSV,  with  an  option  to  order  another expiring November. We see each  DSV  contributing  a likely  USD39.4m per  vessel  per  year (See Figure 1) and this can grow to USD68m and higher if Kreuz secures deepwater work.  The  first  DSV  will  be  delivered  in  July  2015,  and  the  second  will  likely  be delivered Jan 2016. These will allow Kreuz’ earnings growth to accelerate beginning from mid-FY15, and the full-year contributions from both vessels will drive a leap in earnings in FY16.

Financial Exhibits

SWOT Analysis

Company Profile

Kreuz is a fast-growing provider of subsea services, owning and operating diving support vessels and remotely-operated vehicles. It specialises in subsea construction and installation of flexible flow lines and cables, as well as inspection -repair-and-maintenance (IRM) of subsea structures. Kreuz was featured in Forbes Asia's "Best Under a Billion" List in 2012.

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Source: OSK