Recently, Great Offshore’s promoters pledged ~13% of their equity holding with Bharati Shipyard to raise money. The shares are pledged with two wholly owned subsidiaries of Bharati Shipyard.
While this does not have a fundamental impact on Great Offshore’s financials, it does raise concerns on the promoter’s ability to withhold a stock liquidation.
We believe that the pledge can also be Bharati Shipyard’s attempt to make sure that Samed Shikhar (jack-up rig) order is not in jeopardy.
Of the ~15% promoter holding, ~13% is pledged with Bharati Shipyard; these shares have no voting rights and hence no management changes are expected due to the share pledge.
Our channel checks indicate that there might be delays to the March 2009 deadline by which Bharati Shipyard is expected to deliver the jackup rig. Transportation problems continue at the Dabhol shipyard, the rig construction site.
We have already seen Bharati Shipyard delay the delivery of the rig from December 2008 to March 2009. A delay in delivery by one quarter could reduce our FY10 EPS by 7%.
Our checks also indicate that the offshore support vessel (OSV) pricing is holding up for most of the contracts signed until the end of May 2009. However, the pricing might see weakness when contracts are up for renewal in the June – July season in 2009.
We maintain our REDUCE call on Great Offshore and reduce our target price to Rs196 from Rs393. Our new estimates include the recently closed acquisitions of the two small port management companies.
A large part of our price revision is attributed to lowering our utilization rates and day rates. In addition, the recent concerns’ surrounding the stock and the financial health of the company has resulted in our WACC increasing to 13.5% from 13%.
The core business has not shown severe weakness, but the negative headwinds surrounding management have hurt the stock.
We believe Great Offshore could be an acquisition candidate, as the underlying assets still hold value, which is not reflected in the current share price due to negative sentiment around the stock.