When confidence is lost, capital markets are brutal

Not only was Q4 disappointing, the 2019 EBITDA guidance was significantly below consensus. As a result, MSEIS has lost 30% of its market cap or enterprise value during the last two days of trading – that is serious. For 2019 MSEIS is guiding on an EBITDA of USD 100m. This however, included USD 33m of non-cash cost related to the BGP contract. With a cash EBITDA of USD 130-135m, translating into a FCF in 2019 of USD 75-80m the stock is trading at a 2019 EV/FCF of 2.8x which is attractive. Despite lack of confidence following Q4, we believe the OBN market outlook is attractive. We see structural growth supported by the USD 400m 2019 backlog and an improved supply/demand balance which already is visible in the pricing on the recent contract awards. This combined with attractive valuation supports a Buy recommendation. We reiterate Buy but reduce our target to NOK 26 from NOK 30 owing to estimate revisions.

· 2019 EBITDA guidance vs. estimates: MSEIS expects 2019 EBITDA of USD 100m equal to a cash EBITDA of USD 133m if we adjust for the noncash cost related to the BGP contract. This compares to our estimate pre the Q4 report of USD 191m. The deviation of USD 58m in EBITDA can be explained by USD 20m from the BGP contract booked in Q4 2018, USD 15-20m related to three months’ idle time for Artemis Athena and the Malaysian contract and USD 20m related to lower profitability on the Qatar contract (12 months’ contract, Fairfield legacy).



· 2019 FCF: Given that cash EBITDA is considerably above accounting EBITDA, FCF will be solid. In 2019, cash EBITDA will be USD 130-135m, while CAPEX of USD 65m, tax payments around USD 10m and USD 15m in positive WC changes owing to the USD 40m BGP sales in Q4 imply a FCF in 2019 of USD 75-80m. This implies that the company currently trades at 2019E EV/FCF or M.cap/FCF of 2.8x



· Valuation: Assuming that the company delivers according to guidance, P/E for 2019 is 5.1x with a FCF yield of 27%. This is attractive and should warrant a repricing of the stock. The company had a 2019 backlog of USD 388m at end Q4 2018, which has increased to above USD 400m following the last contract announcement giving a revenue coverage of almost 80%. In the guidance, management has not included any revenue or EBITDA from the node CAPEX program and hence, if backlog is executed according to budget, estimate risk is on the upside.