Reach Subsea - A Norwegian Stock Trading At a Highly Attractive Level

Reach Subsea is a norwegian provider of IMR, ROV and other services for the maintenance of oil-riggs, offshore windmills and freights, currently trading at the Oslo Stock Exchange under the ticker: REACH. The oil- and gass industry, as well as most companies associated with that industry have been underappreciated in the market for some time now. Reach Subsea falls into that category of companies, currently trading at an enterprise value/ebit of 2,83. Solely looking at a p/e ratio, the low levels could potentially be defended by high debt levels and other weaknesses, but after looking at the enterprise value/ebit (taking all debt and cash on the company's balance sheet into account), the company looks both financially healthy and highly undervalued. The low multiple peeked my interest, and I chose a conservative discounted cash flow analysis to further calculate the company's intrinsic value. I've used Reach Subsea's two-year average free cash flow for the base free cash flow in the analysis, landing at 209M NOK. To lean on the highly conservative side I've used a 2% growth rate for the ten-year period projecting the company's cash flows. The terminal multiple has been set at 5, expecting some multiple expansion during the ten-year period. When discounting the future cash flows of Reach Subsea, I've landed on a discount rate of 15%, to safely assure that the company can produce market-beating returns. Doing so has resulted in a current intrinsic value estimate for Reach Subsea at 6,59 NOK per share. That translates to a market cap of 950 million NOK, and following the principles of the father of value investing, Benjamin Graham, the calculation will also include a margin of safety. Including a 50% margin of safety puts the current intrinsic value of Reach Subsea at 3,30 NOK - the stock is currently trading at 3 NOK. 

Solely basing an investment on a dcf can be misleading, since it excludes important factors such as quality of management and the ability to efficiently allocate capital within the business. When it comes to financial strenght, Reach Subsea currently has a current ratio of approximately 1,72, indicating that the company has the liquidity and financial ability to meet their financial obligations. To measure the management's performance I've chosen to include ROE and ROIC as financial metrics. Last year, Reach Subsea operated with a ROE of 20,5%, and ROIC of 10,93% respectively. With both metrics being in double-digits, this indicates that the management is both able and efficient. 

With average revenue growth of 17% annually for the last five years, reaching stable profitability and a significantly reducing capital expenditures, Reach Subsea looks poised for stable future growth for years to come. As mentioned earlier, the discounted cash flow analysis used a growth rate of 2%, leaning on an exaggerated conservatism. This shows that the underlying company can face multiple headwinds and underperform, whilst still delivering market beating returns because of the underlying stock mean reverting. 

One of the most important and attractive parts of Reach Subsea is their introduction of Reach Remote, expected to come in late 2022-early 2023. Reach Remote is a remotely operated subsea vessel, developed to perform Reach's services and maintenance more cost-efficiently and environmentally friendly. Reach Subsea expects the introduction of Reach Remote to reduce capital expenditures and daily operating costs by 65%, whilst reducing the daily Co2 emissions by 90%. Not only will the company become more environmentally friendly, and therefore my appealing to larger corporations, but costs will also be significantly reduced. 

Reversion to the mean and the launch of "Reach Remote", a remotely operated vehicle for the maintainence of cargo-ships, offshore windmills and other offshore-services (which will significantly reduce operating expenses and the company's carbon foot print), will work as catalysts for Reach Subsea's intrinsic value to be fully reflected in the stock price. While waiting for the general market to realize Reach's true intrinsic value, shareholders can enjoy a dividend yield of approximately 5% on a quarterly basis.