Pacific Radiance - DBS Research 2017-08-15: Debt Overhang Persists

Pacific Radiance - DBS Vickers 2017-08-15: Debt Overhang Persists PACIFIC RADIANCE LTD. T8V.SI

Pacific Radiance - Debt Overhang Persists

  • 25% q-o-q uptick in revenue as OSV utilisation improves, but losses persist.
  • Negative operating cash flow of US$10.3m for 2Q17.
  • Pacific Radiance (PACRA) is looking at capital restructuring options – advisor appointed.



Maintain FULLY VALUED as we see liquidity and solvency risks despite a potential capital restructuring plan. 

  • Though we saw some recovery in revenues during 2Q17 as utilisation rates improved, day rates are expected to remain low and near breakeven levels in the short term. Thus, Pacific Radiance (PACRA) remains loss-making and operating cash flows (OCF) remained negative in 2Q17. 
  • Government-backed financing facilities have provided PACRA a near-term lifeline to fund working capital needs, but that cannot last forever. With a S$100m note due in August 2018, PACRA is now looking at debt restructuring options.
  • Pending more visibility on negotiations with stakeholders including banks and bondholders, we do not see any story for equity holders in the near term, especially as sentiment towards the sector remains affected by negative news flows related to restructuring and defaults. 
  • Additionally, a potentially long trading halt/suspension period under a debt restructuring scenario could result in a liquidity discount on the shares.




WHAT’S NEW


Core losses shrink but OCF remains negative; restructuring plan will be key 

  • Core losses shrink q-o-q to US$7.6m on higher OSV revenues and cost reductions. OSV segment revenues increased by c.25% q-o-q to US$11.3m, as OSV utilisation rate increased from mid-30% in 1Q17 to over 50% this quarter. 
  • Subsea vessel utilisation dipped slightly to 40% (from ~50% in 1Q17). The higher top line fed through to improvement in the bottom line as net losses were reduced to US$7.6m in 2Q17 compared to US$14.7m net loss in 1Q17. 
  • Losses were also contained by continued implementation of cost-control measures and ~25% of the fleet (mostly tugs and barges) are warm stacked currently, with a higher proportion (of c.40%) targeted to be warm stacked in the future. 
  • Management is also aiming for further SG&A cost reductions towards yearend.

Debt restructuring plan in the works. 

  • Pacific Radiance said that it has appointed advisors to “assist in reviewing the overall capital structure and developing a feasible restructuring plan”. 
  • To recap, PACRA had already engaged in a restructuring exercise in 4Q16 for c.US$185m of its term loans and revolving credit facilities (RCFs), extending their maturity profiles from 7y to 12y on average. 
  • We believe the potential restructuring exercise to come will be a more broadbased one, involving other stakeholders, as indicated by the announcement.

Operating cash flow (OCF) remains in the red. 

  • PACRA recorded its seventh consecutive quarter of OCF outflows – at c.US$10.4m for the quarter, of similar magnitude to previous quarters on average – as cash was stuck in working capital.

Government-backed facilities provide near-term liquidity.

  • PACRA drew on its S$70m Internationalisation Finance Scheme (IFS) facility during the quarter; gross debt increased by c.US$22.2m q-o-q, bringing PACRA’s cash balance up to US$36m. 
  • We note that this source of liquidity is finite, and given the continued OCF outflows, coupled with no significant rebound in day rates expected in the near term, the restructuring plan remains the key factor going forward in ensuring PACRA’s survival.


Where we differ: 

  • Despite some operational improvements YTD in 2017 (for PACRA and for the larger sector as well) as the OSV market bottoms, we prefer to avoid this stock as the risks related to the restructuring plan and S$100m notes due in 2018 do not justify any potential rewards.


Potential catalyst: 

  • Successful negotiation of capital restructuring plan could be a positive catalyst going forward. A plan that favours debt-holders heavily and dilutes equity could be a negative though.


Valuation

  • Roll our P/BV multiple to FY18 and tweak it downwards to 0.15x FY17 net book value, to account for increased liquidity risk, which lowers our TP to S$0.07. Maintain 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.




Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | http://www.dbsvickers.com/ 2017-08-15
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 0.07 Down 0.100



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