Pacific Radiance - Debt overhang remains a concern
- 4Q16 core profits below on the back of lower utilisation and day rates in a weak OSV market.
- Multi-year contract for five OSVs in the Middle East should help utilisation in FY17.
- Net gearing up to 1.6x as equity base has eroded.
Maintain HOLD as debt overhang remains.
- Since the upswing in oil prices back to the ~US$55/bbl level (Brent) post-OPEC deal, the market has displayed a clear preference for safer OSV names to ride the long-term upcycle.
- For PACRA though, we expect that its August 2018 S$100m note maturity, high net gearing of c.1.6x, and weak operating cash flows will remain an overhang on the stock, despite the long-term outlook having improved in the last few months.
4Q16 weaker than expected.
- PACRA’s revenues fell by c.36% qo-q in 4Q16, largely attributable to weak OSV segment revenue, as utilisation and day rates remained low (c.40+%; AHTS rates below US$1/bhp). The subsea segment also remained weak with utilisation rates around the mid-20% level by our estimates.
- Nonetheless, on the back of more stable oil prices and signs of higher y-o-y oil major capex in 2017, we expect a gradual recovery in the OSV market from late 2017 or 2018 (due to a lag effect) and thus expect PACRA’s net losses to diminish in FY17/FY18.
- A US$68m multi-year contract secured for work in the Middle East on five previously idle OSVs should also help.
Lengthened bank debt profile offers brief respite, but operating cash flows remain negative.
- After managing to push out its term loan profile from seven to 12 years during the quarter, bank loans classified as current have declined from US$103m in 3Q16 to about US$49m as of 4Q16. Thus, there will be lesser nearterm liquidity pressure in 2017.
- However, operating cash flows have been negative for five quarters now, and thus visibility on an eventual redemption of the August 2018 bonds remains low.
- Rolling over our P/BV base to FY17 and tweaking our multiple to 0.35x P/BV to account for an eroded equity base, our TP remains unchanged at S$0.16.
Key Risks to Our View
- A sharp spike in oil price – albeit unlikely in our view – could result in uplift in utilisation and day rates for vessels, boosting earnings and the share price.