Description

NOTE-USD functional currency despite share price in NOK

Currency converted at NOK/USD= 5.71

Overview

VPOS is a provider of precise navigation and positioning solutions (signals + equipment) for marine vessels.  As a very small spin (<1% of revenues) out of large-cap Norwegian oil services provider Subsea 7 (SUBC), VPOS initially faced extreme selling pressure from SUBC shareholders who were unable or uninterested in owning the security. While performing strongly from its highly discounted initial listing, VPOS's share price continues to suffer from investor ignorance as it remains relatively uncovered and underfollowed.  However, despite this investor neglect, VPOS is a very attractive business with a strong competitive position in a growing end market. As a result of continued strong growth in underlying free cash flow, VPOS's stock easily see upside to NOK 38-43 as well as downside protection at NOK 14, suggesting an attractive risk reward at NOK 22.

Capitalization and Valuation

Post spin, VPOS has 33.1mln diluted shares for a market cap of $128mln (729mln NOK) at NOK 22.  The company has no debt and 10.9mln in cash for a total EV of $117mln.  2013 EBIT should be ~$12mln (9.5x), and 2012 EPS should be ~NOK 1.70 (13x) and 2013 FCF should be ~$8.5mln (6.7% yield).   

Marine Business

VPOS is a very high quality business with a strong competitive position in a growing end market leading to a recurring stream of subscription revenues.  Barriers to entry in this industry include brand reputation (no one wants to use an untested player), and a global network of 80 base stations and service resources.  Conversations with customers, competitors, former employees and industry consultants have confirmed that switching costs for customers are high as positioning solutions are mission critical yet only represent a very small portion of the total operating costs of an offshore vessel.  This diligence has also suggested that VPOS's technology and service (key competitive factors) have improved over the last few years and are now considered to be as good or better than those of its main competitor Fugro.  This improvement should allow Veripos to continue to gain market share in newbuilds vs. its larger competitor (Current mkt shares- Fugro ~60% , VPOS~30%, 10% C&C, Fugro used to have over 85% mkt share in 2008).  VPOS's financial results support the notion that this is a high quality business as the company generated a 35% ROIC in 2012 and ROICs have consistently been above 30% since 2009 (no public financials prior).

VPOS has grown revenue in its marine business at an 11% CAGR since 2009 and based on industry forecasts from Clarkson's should continue to see strong high-single digit growth for the next few years driven by additions to the dynamic-positioned (DP) fleet. 

Onshore Business

Additional growth should come from the company's 2013 expansion into the sizeable onshore market which VPOS has recently entered with its new Terrastar service.  The company has partnered with device providers (already partnered with Sepentrio and Altus and seeking more parrtners) and will purely be selling its signal to the device manufacturer's customers. 

What is interesting about the onshore market is that it shares the same characteristics that allowed VPOS to take share in the marine market despite customer's general unwillingness to switch.  In the marine market, VPOS expanded dramatically after industry leader Fugro bought the previous #2 Thales Geosolutions in 2004, giving them over 90+% of the market. As customers were uncomfortable with Fugro's dominance of the market, they pushed Subsea to expand Veripos (which was mainly an internal solution at that point) and market it broadly to create a strong #2 player.  This industry structure allowed Veripos to take significant share in an industry that normally has low levels of customer churn.

The onshore signals market has similar competitive dynamics to the offshore market with the current major players being Fugro's Omnistar and C&C/Deere's Starfire. However, in 2011, Trimble purchased Omnistar from Fugro leaving no independent player in onshore signals as.   Because other onshore device manufacturers are uncomfortable purchasing from Trimble and Deere, VPOS was presented with an opportunity to enter the onshore signals market. The company is working to partner with other device providers (already partnered with Sepentrio and Altus) to package the Terrastar signal with their hardware.  VPOS expects ~$1mln of Terrastar revenue in H2 2013 which should grow dramatically in 2014/15.  With an onshore TAM of ~$60mln currently and significant market growth expected, then the company could generate $18mln+ of very high margin revenue (purely subscription signals revenue) if they were able to gain similar market share. 

Mgmt

Management is well-regarded in the industry and has a great deal of experience in the business. CEO Walter Steedman has been with VPOS since its creation in 1989 and assumed the CEO role in 2007.  The board has also decided to pay a $0.09 dividend in acknowledgement that the business generates significant excess cash.

Upside

Based on a variety of assumptions surrounding continued growth in marine and the launch of Terrastar, I think VPOS could generate $13.5-15.5mln of FCF in 2015 (~NOK 2.30-2.70 per share).  At a 6.5% FCF yield, that would suggest a share price of NOK 38-43 including cash. I believe this FCF yield is conservative for a business of VPOS's quality.

Downside

In a severe economic downturn, VPOS's end market demand could slow as newbuild demand halts and oil and gas exploration declines leading to lower usage of the offshore fleet.  If, instead of continued growth, we assume that VPOS's revenue contracts by 10% in a downturn and the EBIT margin declines to 22.5% (previous average 26.5%), then FCF would decline to ~6mln (NOK 1 per share).  At an 8% FCF yield, VPOS would trade at ~NOK 14 including cash.

Catalyst