PACC Offshore Services Holdings - DBS Research 2017-02-22: Poised to ride capex recovery

PACC Offshore Services Holdings - DBS Vickers 2017-02-22: Poised to ride capex recovery PACC OFFSHORE SVCS HLDG LTD. U6C.SI

PACC Offshore Services Holdings - Poised to ride capex recovery

  • Impairments of US$310m dragged down headline profit in FY16.
  • Oil majors’ capex increases in FY17 should boost sentiment towards the stock.
  • We expect gradual earnings recovery from 2H17.



Maintain BUY as we see green shoots appearing. 

  • Sentiment for oil services stocks should improve as we see more evidence of an inflexion point in oil majors’ capex plans – some oil producers have already surprised on the upside (e.g. Exxon/ CNOOC increasing 2017 capex by 14%/20-30+% y-o-y respectively). 
  • A ramp-up in activity at cheaper onshore regions (e.g. US shale) should lead the recovery, but we believe an offshore activity recovery is also showing green shoots. 
  • We have seen the offshore working rig count increase in February 2017 for the first time since July 2014 (albeit only slightly). Thus, despite a still-dismal 4Q16, we expect a gradual earnings recovery in 2018. 
  • With no bonds outstanding, positive operating cash flows, and a proven ability to secure work for its vessels even during the downturn, we like PACC Offshore Services Holdings (POSH) as a beta play on the capex recovery. 
  • In addition, POSH is among the potential privatisation candidates with high ownership of 81.89% by majority shareholder, Kuok (Singapore) Ltd.


Kitchen-sinking impairments were expected. 

  • POSH reported impairments of c.US$310m in 4Q16, mainly on its OSV assets and goodwill attributable to the Transportation & Installation segment.
  • Together with impairments of c.US$148m taken in 4Q15, we estimate that POSH has written down close to 30% of its aggregate fleet value. Together with a more sanguine outlook on oil prices, we think major impairments going forward are unlikely.


Expecting gradual recovery from 2H17 onwards. 

  • Ex-impairments, POSH recorded a core loss of S$35.3m for the quarter, higher than core losses of US$12.9m in 3Q16. This was due to across-the-board weakness at its four operating segments, as well as higher depreciation on five new-build vessels taken into the fleet. 
  • We expect core losses to contract going forward, with US$28m/US$16m losses in FY17/18 respectively.


Valuation

  • We maintain our BUY call but adjust our valuation peg to 0.8x on an impaired book which lifts out TP slightly to S$0.42.


Key Risks to Our View

  • Failure to secure/extend charter contracts for the SSAVs. Our model assumes that the POSH Xanadu is 50%-utilised during FY17, while the POSH Arcadia should start its 6-month contract mid-2017. If contracts for the Semi-Submersible Accommodation Vessels (SSAVs) are not renewed, or if there are delays, there could be downside risk to earnings.




Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-02-22
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.42 Up 0.410



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