Pacific Radiance - DBS Research 2017-05-18: Liquidity Issues Cloud Outlook

Pacific Radiance - DBS Vickers 2017-05-18: Liquidity Issues Cloud Outlook PACIFIC RADIANCE LTD. T8V.SI

Pacific Radiance - Liquidity Issues Cloud Outlook

  • Unpledged cash balance down to US$15.2m.
  • 1Q17 net loss at US$14.7m; revenues hit by one of the larger OSV vessels going off-hire.
  • Sixth consecutive quarter of negative OCF in 1Q17.
  • Funding persistent operating cash outflows will be a challenge in the near term.



Downgrading to FULLY VALUED as cash balance is whittled down. 

  • Pacific Radiance’s (PACRA) unpledged cash balance plunged sharply – from US$42.2m as of 4Q16 to US$15.2m this quarter – largely due to negative operating cash flows (OCF) of US$13.1m during the quarter (marking the sixth consecutive quarter of negative OCF), as well as net debt repayments of US$18.6m. 
  • As operating losses are set to continue in subsequent quarters, this does not leave much comfort as far as funding near-term working capital needs are concerned.


Sources of near-term liquidity not significant. 

  • There is minimal visibility into PACRA’s undrawn banking facilities, though there is some cash available from the government-promoted schemes.
  • Management indicated near-term sources of liquidity include a S$15m bridging loan facility (partially utilised) from SPRING Singapore, though this is a fairly small amount, as well as a yet-to-be-approved S$70m facility under the Internationalisation Finance Scheme (IFS). 
  • However, our understanding based on public disclosure is that the IFS loan is to be used only for fixed asset purchases, project financing and M&A financing. Thus, we are unsure how this can help support working capital outflows.


Lengthened bank debt profile has helped, but August 2018 bonds are a worry. 

  • To recap, in 4Q16, PACRA managed to push out its term loan profile from seven to 12 years, thus reducing the quantum of its bank loans classified as current liabilities by around US$50m or so. 
  • However, PACRA still has a S$100m note due in August 2018, which remains a major liquidity hurdle.


Valuation

  • We tweak our P/BV multiple downwards to 0.2x FY17 net book value, to account for the increased liquidity risk, which lowers our TP to S$0.10. 
  • Downgrade to FULLY VALUED.


Key Risks to Our View

  • A large equity injection or a generous debt restructuring programme approved by PACRA’s lenders could boost the share price.


WHAT’S NEW


1Q17 earnings review: Low cash balance a worry 

  • 1Q17 core losses in line. Core losses of US$14.7m for 1Q17 were in line with our earlier forecasts of US$15.5m. Gross losses of US$7m were also more or less in line with our forecasts, and represented a q-o-q improvement over 4Q16’s gross losses of US$14.5m. 
  • However, the reason for the improvement – a significant uptick in subsea revenues – was unexpected, as we had earlier expected the OSV segment to be the one with a q-o-q improvement owing to some vessels beginning work on Middle East charters.

Revenues higher q-o-q due to higher subsea vessel utilisation.

  • Despite PACRA’s OSVs seeing a q-o-q improvement in utilisation from 20+% in 4Q16 to mid-30% in 1Q17, and day rates improving q-o-q as well, revenue from the OSV segment declined by c.13% q-o-q as one of the larger, higher-earning vessels in the fleet went off charter during the quarter. This was offset by higher revenues at subsea segment, which increased from US$1.3m in 4Q16 to US$4.4m this quarter, as the DSVs saw higher utilisation of c.50% during 1Q17. 
  • One of PACRA’s DSVs is on a 3-year campaign in Indonesia with a minimum 180-day work commitment, while the other managed to find some work offshore Malaysia.

Net gearing edges up on a lower equity base. 

  • A net decrease in bank debt of c.US$14.3m during 1Q17 was more than offset by a lower total equity base due to headline losses of US$14.7m, resulting in a slight uptick in net gearing during the quarter to 1.7x (from 1.6x as of 4Q16).

Sixth consecutive quarter of negative OCF. 

  • Movements in cash flow this quarter are a negative point – PACRA’s unpledged cash balance has been drawn down from US$42.2m as of 4Q16 to US$15.2m this quarter. This was due to 
    1. negative OCF of about US$13.1m and 
    2. gross debt repayments of about US$18.6m during the quarter. 
  • This is the lowest cash balance since the onset of the oil crisis.

Outstanding capex is fully financed. 

  • PACRA’s sole newbuild vessel in the orderbook remains due for delivery towards the end of 2017. The vessel has a charter contract in place, and the outstanding amount is fully financed. Hence, we are not too worried about this.




Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | http://www.dbsvickers.com/ 2017-05-18
DBS Vickers SGX Stock Analyst Report FULLY VALUED Downgrade HOLD 0.10 Down 0.160



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