PACC Offshore Services Holdings - DBS Research 2017-05-05: Selloff Provides Buying Opportunity

PACC Offshore Services Holdings - DBS Vickers 2017-05-05: Selloff provides buying opportunity PACC OFFSHORE SVCS HLDG LTD. U6C.SI

PACC Offshore Services Holdings - Selloff provides buying opportunity

  • Core loss of US$18.4m; gross losses were expected.
  • JV earnings hit as 5 JV vessels undergo drydocking.
  • Macro picture: net OSV fleet attrition for the first time in years in 2Q17; offshore rig count rebounding.



Maintain BUY as offshore activity continues to pick up. 

  • PACC Offshore Services Holdings (POSH)’s share price has been subject to a recent selloff in SGX-listed offshore/marine stocks, which we think has been a function of profit taking, a knee-jerk downswing in oil prices, as well as continued news of distress cases (e.g. Marco Polo Marine’s suspension of trading).
  • However, we think fundamental drivers of a recovery remain intact, and the current selloff creates a buying opportunity.


Offshore rig count bottoming out. 

  • The offshore rig count continues to rebound off the lows, and on the supply-side, 2Q17 so far has shown the first quarter of OSV net attritions seen in years. 
  • With no bonds outstanding and positive operating cashflows on a rolling 12-month basis, we see POSH as a healthy name amongst liquidity-starved players, and a survivor of this crisis that investors can take early positions in to ride the eventual upswing. 
  • POSH is also a potential privatisation candidate with high ownership of 81.89% by majority shareholder, Kuok (Singapore) Ltd.


Overall weakness was expected; q-o-q core earnings improve 


Q-o-q improvement in core earnings; overall weakness was expected. 

  • POSH recorded core net loss of US$18.4m in 1Q17, an improvement over 4Q16’s core loss of US$35.3m, though not as large an improvement as we had forecasted. 
  • OSV and Offshore Accommodation (OA) gross losses remained largely stable q-o-q, but the Transportation and Installation (T&I) segment posted an improvement and moved back into a gross profit position of US$1.3m for the quarter. 
  • A key dampener on earnings was unexpected losses of c.US$4.4m at the JV level owing to five vessels having undergone dry-docking during the quarter at key JV POSH Terasea, in preparation for upcoming towage and positioning projects.

Kensteel files claim for S$24.5m against POSH. 

  • POSH announced developments in an arbitration case that had begun in September 2015: to recap, in 2015 POSH had entered into a sale and purchase agreement (SPA) to acquire a plot of land in Singapore from Kensteel Engineering Pte Ltd, subject to JTC approval. Approval was not granted, and Kensteel sought to claim damages of c.S$3.3m from noncompletion of the sale as well as keep the deposit paid by POSH of c.S$3.8m. The claim for damages was later reduced to S$2.219m. 
  • On 3 May, it was announced that Kensteel made an additional claim of S$24.5m representing the original sale price (to POSH) and the price that it had recently agreed to sell the plot of land to a third party in March 2017.
  • While our view is that the claim will not be approved by the courts, in a bear scenario, the total claims of S$30.519m amounts to c.5% of POSH’s market capitalisation (or about S$0.016 per share).

Net gearing ticks up to 1.05x but undrawn bank lines, no bonds outstanding, and strong parentage give comfort. 

  • Net gearing inched up slightly from 1.0x as at end-4Q16 to 1.05x as at end-1Q17. However, POSH’s debt consists purely of bank loans, with no bonds outstanding, which is positive as we view bonds to be less easily refinanced in this environment. 
  • We remain cognizant that the reason for POSH’s net gearing of 1x is very much due to it having taken above-industry average levels of asset impairments in 4Q16 (i.e. being more prudent/conservative) of c.30% of fleet value, and not due to large debt drawdowns. 
  • Off-balance sheet, POSH has undrawn bank lines of US$274m – more than sufficient to fund capex of c.US$75.4m outstanding. This at least leaves an undrawn bank line buffer for other uses. We believe banks in general remain accommodative towards offshore players, especially towards stronger names like POSH, and thus view the company as far from being at risk of refinancing issues. 
  • The final point is that POSH benefits from having a strong parentage in the form of Kuok Group, which will help it retain access to financing amid the downturn.

Macro indicators point to a bottoming out. 

  • Whilst markets have focused on the US shale boom, offshore activity levels have quietly picked up as well, which may have gone unnoticed. The offshore rig count bottomed out in Jan/Feb 2017 and has been rising steadily since then, indicating higher demand for OSVs. 
  • OSV supply-side pressure is also waning, with 2Q17 so far showing a net global vessel attrition – the first time we’ve seen it in years 


Continued core losses were anticipated. 

  • POSH recorded core net loss of US$18.4m in 1Q17, an improvement vs. core loss of US$35.3m in 4Q16. The group remains in a gross loss position, but that was expected, as we are only just seeing green shoots of a recovery; 2017 should be another weak year earnings-wise.
  • JV earnings took a hit this quarter due to lumpy costs in the form of dry-docking of 5 vessels under POSH Terasea in preparation for upcoming jobs – not something to fret about.


Valuation: 

  • We maintain our BUY call but adjust our TP (pegged to 0.8x P/B) slightly downward to S$0.41 as we tweaked our earnings slightly lower to factor in slightly higher-than-expected OSV losses.


Key Risks to Our View


Failure to secure/extend charter contracts for the SSAVs. 

  • Our model assumes that POSH Xanadu is 50%-utilised during 2H17, while the POSH Arcadia starts 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/ 2017-05-05
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.410 Down 0.420



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