PACC Offshore Services Holdings - DBS Research 2017-08-02: Earnings Look To Have Bottomed

PACC Offshore Services Holdings - DBS Vickers 2017-08-02: Earnings Look To Have Bottomed PACC OFFSHORE SVCS HLDG LTD. U6C.SI

PACC Offshore Services Holdings - Earnings Look To Have Bottomed

  • PACC Offshore Services Holdings (POSH)’s core losses halved q-o-q to US$9.1m in 2Q17.
  • OSV utilisation up to 64% (vs. 59% in 1Q17).
  • POSH Terasea boosted JV profits on high workload in 2Q17; workload should remain high in 3Q17/4Q17.
  • Positive OCF of US$11.6m YTD in FY17.



Better earnings outlook in 2H17; long-term recovery trend intact. Maintain BUY. 

  • PACC Offshore Services Holdings (POSH)’s 2Q17 core losses halved q-o-q on an improvement in OSV utilisation to 64%, as six out of twelve OSVs on long-term charters in the Middle East began work; the remaining six will be deployed in 2H17, giving a further boost to earnings.
  • JV/associate income was also positive as POSH Terasea JV secured a healthy towing workload during 2Q17, and for 3Q- 4Q17 as well. Key semi-submersible accommodation vessel (SSAV) POSH Arcadia is also slated to commence work on the Shell Prelude FLNG project shortly (3Q17/4Q17). We therefore see positive earnings momentum in 2H17. 
  • In the medium-term, the rig and OSV market has decidedly bottomed in 1Q17, with the offshore working rig count now up c.6-7% from its February lows. 
  • With no bonds outstanding and positive operating cash flows YTD in FY17, POSH continues to be a safe name to ride the gradual offshore service sector recovery. 
  • POSH is also a potential privatisation candidate with high ownership of 81.89% by majority shareholder, Kuok (Singapore) Ltd.


WHAT’S NEW

  • Core losses halved q-o-q on higher OSV utilisation rates and profits from JV POSH Terasea Core losses halved q-o-q to US$9.1m. 
  • Revenues of US$42.4m were 23% higher q-o-q owing to higher OSV utilisation, which flowed down to the bottomline as costs were kept under control. 
  • JV/associate earnings also swung into profits, which further helped to boost net profits. 
  • Overall, POSH posted earnings above expectations; we had forecasted c.US$12m in losses for 2Q17.

OSV segment sees uptick in utilisation as vessels begin work on long-term Middle-Eastern contracts. 

  • POSH has deployed six vessels for work with a Middle Eastern national oil company (NOC) on long-term contracts, which has helped boost OSV utilisation to 64% in 2Q17, up from 59% the previous quarter. 
  • Six more newbuild 5,220bhp AHTS vessels will be delivered and deployed to the same NOC across 3Q17/4Q17; we can thus expect a further boost to utilisation rates and profits from these vessels.

High workload for POSH Terasea pulls JV/associate income out from the red. 

  • POSH saw a sharp turnaround in its JV/associate line in 2Q17, recording profit of US$4.6m, after four consecutive quarters of losses. This was mainly due to key towage and installation JV POSH Terasea having achieved higher workload on towage and positioning of the INPEX Icthys Central Processing Facilities in 2Q17. 
  • With jobs lined up to tow and position Shell’s Prelude FLNG platform in 3Q17 and the Egina FPSO unit in 4Q17, we can expect workload to remain elevated at POSH Terasea – a boon for JV/associate earnings.

Offshore Accommodation (OA) segment losses widen, but Arcadia’s Prelude job should reverse this in 2H17. 

  • The OA segment recorded gross losses of US$4.3m for 2Q17 – the largest loss so far – as both SSAVs were off-charter. However, with POSH Arcadia (SSAV) due to depart this week for Australian waters to begin work on the Prelude FLNG hookup and installation (which we understand will provide ~150 days of work plus possible extensions), the segment should see a significant boost to gross profits in 2H17.

Positive operating cash flows (OCF) is a plus. 

  • POSH recorded positive OCF of US$14.8m for the quarter and US$11.6m for 1H17 – which is encouraging relative to some peers who are consistently seeing OCF outflows.


Where we differ: 

  • We believe the OSV market has bottomed, and POSH is poised to ride the gradual upswing. 
  • Additionally, we think the market has overlooked the fact that POSH made the largest impairments as a percentage of fleet assets over FY15/16 (c.32% of fleet value). Its equity base is thus more eroded, and P/B valuation looks inflated vs. peers, but is not.


Potential catalyst: 

  • We think POSH’s SSAVs can earn > US$3m in gross profit per quarter each if fully utilised. Thus their earnings potential is large, and SSAV contract wins are a key catalyst.


Valuation

  • We maintain our BUY call with unchanged TP of S$0.41 (pegged to 0.8x P/B). OSV and JV/associate earnings were revised upwards but we also tempered our expectations for POSH Xanadu’s utilisation rate in 2H17/18.


Key Risks to Our View

  • Failure to secure/extend charter contracts for the SSAVs. There could be downside risk to earnings if further contracts fail to materialise for POSH’s two SSAVs.






Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | http://www.dbsvickers.com/ 2017-08-02
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.410 Same 0.410



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