STX Sails Ahead With New Growth Engines

Shipping and energy group STX plans to tackle higher market uncertainties by putting more focus on alternative but promising segments ― offshore, value-added ships and energy. Although, time is not on the side of most of leading shipbuilding companies including STX Shipbuilding due to the prolonged economic downturn, the group's top executive simply cut speculation over possible liquidity worries, citing its sizable internal reserves.
"We have a big enough cushion to make it through the slump and provide the means to acquire more ship contracts," the group's Vice Chairman Lee Jong-chul told The Korea Times in February.
"The group is currently sitting on around $700 million in cash reserves and aims to increase that amount to more than $1 billion," according to Lee.
Stock analysts were generally positive over the efforts by the group to diversify its business portfolios overseas, recommending clients to hold stocks of STX Shipbuilding and STX Pan Ocean as a "long-term" strategy.
"It is expected that the group's shipbuilding and shipping units will turnaround in the second half of this year after worries over the global recession ease. Cash reserves are currently enough to cushion the financial turmoil," Woori Investment & Securities, a local brokerage wrote in a recent memo to clients.
Offshore Projects
For the bigger South Korean shipbuilders, getting bigger business chances departing from traditional areas has emerged as their top concern.
The global shipbuilding industry is in rough waters. According to Clarkson, a market research firm, the shipbuilding price index dropped one point to 157 as of April 3 ― the lowest this year.
Meanwhile, global orders for new vessels stand at just 26 so far this year, a whopping 96 percent drop from a year ago.
Now, STX Shipbuilding ― a late starter in the offshore sector ― is all set to go one step further in offshore-related parts through a facility in Dalian, China, and the acquisition of a yard in Brazil when it took over Finland's Aker Yards.
"We are targeting raising new orders for offshore vessels and plants by 80 percent this year to a combined $1.8 billion," group spokesman Lee Kwang-ho said.
STX officials said the target is achievable taking into consideration the weakening South Korean won against the greenback.
The spokesman added when the won-dollar rate drops 100 won, the group's shipbuilding unit is forecast to gain 8 percent in profit margin growth.
In a move to add further momentum in offshore-related segmentations, the group is considering participating in a $1 billion shipyard project in Russia's Far East.
"It's a premature to say something about the project in Primorsk, which is being led by Russian investment firm Summa Capital," another spokesman Kim Ho-jeong said.
"But it is true that Summa Capital has made contact with STX," according to Kim.
The shipyard will be capable of building ships up to 250,000 tons with tankers, gas carriers and offshore structures targeted for state-run energy companies Gazprom and Rosneft, according to sources.
Analysts say the deal, if realized, would enable the shipbuilder to increase its market share from Russian ship owners and energy companies seeking to expand their fleets of icebreaking tankers and bulk carriers as well as offshore units, in return for technology transfers and services, including new shipyard construction technology.
"That's positive for STX Shipbuilding by gaining more experience in offshore construction, it will increase its share in the lucrative market," an analyst at Goodmorning Shinhan Securities said.
Last week, STX Europe signed up to build three icebreaking tugs for the Caspian Sea.
"With Caspian Offshore Construction being a new customer of STX Europe, these contracts are of strategic importance to us. The Caspian Sea is of great interest to STX Europe, especially the Northern part where our icebreaking expertise is required," said Roy Reite, president of STX Europe's Offshore and Specialized Vessels.
Additionally, the cruise business is showing signs of steady improvement despite tight credit and a bleak outlook, industry watchers say.
The Miami-based cruise giant, Royal Caribbean Cruise is paying the balance on a ship through cash installments as construction progresses on the $1.2 billion vessel at STX Europe's shipyard in Turku, Finland.
No Liquidity Worries
Behind the "offshore-related pitches," there is growing confidence over market conditions.
The group's ship engine making unit STX Enpaco may raise up to 29.9 billion in a Seoul initial public offering (IPO).
"Shares will be listed and start trading on the main KOSPI index on May 15," the company spokesman said.
The unit plans to float 2.3 million shares in the range of 10,000 won to 13,000 won per share, making the IPO worth between 23 million and 29.9 million won.
"The South Korean stock market is heading toward good territory, while market conditions in the global shipbuilding industry have seemed to bottom out," group spokesman Kim said.
The news came two months after Vice Chairman Lee clarified the plan for an IPO for STX Europe this year either in the United Kingdom, Singapore or South Korea.
"Once market conditions show clear signs of a turnaround and investor confidence revives, we will push the plan forward," Lee said.
Analysts are mixed over the plan, but they generally agree it is highly unlikely that the group will suffer a sudden liquidity crisis, adding the massive cash-raising plan will not burden the group's financial soundness.
STX's Chinese affiliates have recently secured $417 million in loans from Chinese lenders to fund the construction of its industrial complex there ― a move to further ramp-up production capacity in value-added ships.
According to data from FN Guide, a local research firm tracking fund markets, the total assets of STX Group soared 66.9 percent to reach 5.6 trillion won as of April 5 from 3.35 million won on March 2.
"Shipbuilding stocks are forecast to steadily rise as woes over the global recession ease," Lee Jae-maan, an analyst at Tong Yang Securities said.
Chairman Leadership
STX officials say steady investment in research and development (R&D) and human resources is also helping the mid-sized group to a better future when the markets go up.
Amid the global downturn, the South Korean government is driving a "job-sharing" program at most leading companies.
Workers in bigger conglomerates have since accepted drastic wage freezes. Executives have voluntarily cut their own pay and that of new college graduates, by as much as 30 percent.
"This is a good time to catch good talent," group Chairman Kang Duk-soo said, referring to the rapidly-soaring unemployment rate among college graduates.
Executives of the group's affiliates agreed to cut their salaries by 10 percent to 20 percent in return for no layoffs, no strikes and the hiring of 1,500 new workers ― the same level that the group sought last year.
"Business is business. The most important thing is how to care and manage human resources efficiently after the market moves up," a manager from STX Enpaco said.
"Several global management programs run by the company have given greater rationality to our employees for better work," according to the manager.