Analysis of ROE and EVA

71 Turnover rate of invested capital’s movement is primarily due to the vessels as they constitute all of the invested capital. The observed difference between Solstad and its peer group therefore is based on the portfolio and composition of vessels the companies choose to have.

Table 13: Peer-group turnover rate of invested capital 2009-2015

Turnover rate IC 2009 2010 2011 2012 2013 2014 2015 Mean

DOF 0,26x 0,27x 0,27x 0,32x 0,36x 0,39x 0,40x 0,32x

Siem Offshore 0,22x 0,19x 0,23x 0,25x 0,26x 0,30x 0,26x 0,25x

Farstad 0,34x 0,30x 0,30x 0,29x 0,29x 0,28x 0,26x 0,29x

Deep Sea Supply 0,24x 0,22x 0,20x 0,20x 0,12x 0,17x 0,12x 0,18x Solstad Offshore 0,29x 0,22x 0,21x 0,25x 0,27x 0,27x 0,24x 0,25x

Mean 0,27x 0,24x 0,24x 0,26x 0,26x 0,28x 0,26x 0,26x

Median 0,26x 0,22x 0,23x 0,25x 0,27x 0,28x 0,26x 0,25x

Source: Appendix A.10

Illustrated in table 13 Solstad has seen a decline in turnover rate, which means the company is not allocating its invested capital as quickly as its peers. While the companies have invested in vessels over the period the turnover rate has not moved as much, which substantiates the historical downward trend we are seeing now. DESSC differentiates itself slightly from the rest of Solstad’s peers with a lower turnover rate, which explains a natural downward pressure on the level of returns the company is experiencing. Despite this, the effect on profit margin is the most important trigger for ROIC. However, with indexing from 2009 we see that the turnover rate has at some stages been growing more rapidly than invested capital pulling ROIC upwards together with profit margins.

This is mostly due to the increased investments in vessels, together with improved dayrates during that period. Solstad is not one of them. The reason for this is that its peers are investing in new vessels but not being able to fully utilize them. The fact becomes evident as we see a drop in turnover rate from 0,29x to 0,24x over the observed period.

6.3.5 Sub conclusion – ROIC

Solstad have displayed an above average ROIC compared to its pees in the historical timeframe.

Over the observed period they have had positive growth in both EBIT and EBITDA-margins leading to stronger profit margins. This is mainly due to their strong exposure to the well developing segment of Subsea-vessels and having high contract coverage throughout the period. A slight decrease in turnover rate and a significant drop in profit margin from 2014 - 2015 have led to a major drop in ROIC overall, though their peers are also experiencing the same financial turbulences due the shift in market conditions in late 2014.

72 therefore the original ROE has been slightly modified in order to include profit before tax instead of net earnings after tax.

Figure 30: Development of ROE in OSV-peer group 2009-2015

Source: Appendix A.11

From the ROE graph we discover the same trends of development as in the ROIC graph, with a big drop from 2009 to 2010, from the aftermath of the financial crisis. Solstad’s ROE has been moving in line with all its peers and is not showing any decisive positive or negative deviation from the mean. However, in 2015, Solstad and Farstad had the biggest drop in ROE - mainly due to a larger drop compared to their peers drop in their market value of equity, while financing their operations with debt. This has led to the players in the industry taking on a tremendous amount of debt in relation to their equity.

Financial Gearing

Financial gearing is calculated by dividing NIBD with the company’s equity. The ratio illustrates how much of the company’s activities are funded by debt and equity.¹²³ As mentioned above, ROE includes the company’s financial gearing and net interest bearing debt, and is therefore an important ratio for investors. The other ratios that affect ROE after ROIC, is the relationship between the spread, ROIC less net interest bearing debt, and the company’s financial gearing.

Table 14 reveal that Solstad have been struggling, seeing as they have increased their f-gear from 1,12x in 2009 to 2,40x in 2015. All companies, except DESSC, who have been following a strict financial policy over the period paying down their debts, have had a fairly aggressive capital structure with an average of 1,73x.

123 Plenborg, T., & Petersen, C. V. (2012). Financial Statement Analysis.

-60%

-40%

-20%

0%

20%

40%

2009 2010 2011 2012 2013 2014 2015

Solstad Offshore Farstad Shipping Siem Offshore

Deep Sea Supply DOF Mean

73 Table 14: OSV-peer group financial gearing 2009-2015

F-gear 2009 2010 2011 2012 2013 2014 2015 Mean

Solstad 1,12x 1,49x 1,98x 2,03x 1,73x 1,86x 2,46x 1,81x

Farstad 0,77x 0,74x 0,78x 0,88x 1,05x 1,28x 1,85x 1,05x

Siem 0,55x 0,72x 0,98x 0,94x 0,95x 1,09x 1,24x 0,92x

DESSC 4,12x 2,94x 2,64x 2,94x 1,48x 0,55x 0,68x 2,19x

DOF 1,74x 2,01x 2,66x 2,92x 3,03x 3,01x 3,43x 2,69x

Mean 1,66x 1,58x 1,81x 1,94x 1,65x 1,56x 1,93x 1,73x

Median 1,12x 1,49x 1,98x 2,03x 1,48x 1,28x 1,85x 1,60x

Source: Appendix A.10, A.13

The result is that Solstad and its peers have been highly sensitive to the spread between ROIC and net interest bearing debt. The high f-gear for the industry is a result of an intensive newbuilding program throughout, which have increased the need to take on more debt. Nevertheless, DESSC has shown to be the exception, where after their restructuring efforts has enabled them to attain a healthier relationship between equity and debt. The increase in f-gear for Solstad and most of its peers is seen as unhealthy and signifies the economic uncertainty surrounding the OSV-industry in general.

Spread

Spread is calculated as the difference between the net borrowing cost and the ROIC of a company.

It is calculated to analyze if the company’s debt is beneficial for their shareholders, and needs to be treated carefully as it included financial items as gain and losses on currency and interest rate derivatives (non-core).¹²⁴ If the company has a negative spread, a return on invested capital that is less than its net borrowing cost, the company loses money on its loans. The opposite is the case if the return is larger than the cost of borrowing. Net borrowing costs will affect everything classified as financials in the income statement, which means that “sale of vessels” and “gains/losses on currency” affects net borrowing costs. The negative spread is a result of the reduction in ROIC.

Table 15: OSV-peer group spread 2009-2015

Spread pre tax 2009 2010 2011 2012 2013 2014 2015 Mean

Solstad 14 % 0 % -5 % 2 % 1 % -4 % -15 % -1,05 %

Farstad 17 % 0 % 1 % -1 % -2 % -4 % -18 % -1,03 %

Siem 27 % -2 % -3 % 0 % -3 % 2 % -22 % -0,23 %

DESSC 2 % 0 % -6 % -1 % -1 % -13 % -21 % -5,66 %

DOF 9 % -3 % -6 % -1 % -3 % -1 % -4 % -1,23 %

Mean 13,7% -0,9% -3,9% -0,3% -1,5% -4,0% -16,1% -1,84 %

Median 13,9% -0,2% -5,2% -0,5% -2,0% -3,8% -17,7% -2,22 %

Source: Appendix A.10, A.13

124 Plenborg, T., & Petersen, C. V. (2012). Financial Statement Analysis.

74 The companies whose capital structure is more heavily weighted towards debt will experience a larger negative spread based on the cost of borrowing. However, the effect will not be as big every year, due to gains/losses on currency and “sale of vessels”.

6.4.1 Sub conclusion – ROE

The terrible market conditions have meant that Solstad and its peers have needed to acquire more debt in order to sustain operations. This has had a clear effect on their financial gearing and spread, and in turn, their ROE which have dropped to a historical low in 2015. Solstad is battling with a capital structure weighted massively towards debt, and is currently destroying value as consequence.