NEEDS BETTER EXECUTION TRACK RECORD
- SSAV growth story has been overshadowed by poor execution.
- Since its IPO in 2013, POSH – despite its fleet quality and reputation – has not quite lived up to investors' expectations, with problems in its Mexico JVs, delays in delivery and contracting of its two flagship semisub accommodation vessels (SSAVs) and weaker-than-expected results in some of its other smaller business segments.
- Thus, we believe it may take a few quarters of better execution and earnings delivery before any sustained re-rating can occur, especially in an environment of weak OSV demand after the fall in oil prices last year.
Near-term vessel demand remains subdued.
- Utilisation rates for POSH’s vessels have been falling over the last two quarters, and the erstwhile Mexican JV vessels have been an additional drag on profitability.
- Gross margins, at 14% in 1Q15, are still way below their usual run rate of 25-30%.
Can SSAVs turn the tide?
- The first SSAV went into contract towards the end of 1Q15, while the second should be delivered by 3Q15.
- The economics of these vessels are very attractive owing to niche market dynamics but POSH needs to find continuous employment for these, which is a challenge as not too many regions require such high-spec vessels.
- There have already been significant delays in delivery of the two SSAVs and there is still no visibility on contract for the second SSAV.
Valuation:
- Despite a poor earnings track record, we maintain our HOLD call, as earnings are likely to improve from next quarter with the full contribution of the first SSAV charter, which should lend some support to share price.
- Our TP of S$0.50 is based on 0.5x FY15 P/BV, in light of below-par ROE expectations for POSH of ~5% in FY15 and increasing earnings uncertainty amid the industry downturn and volatile oil price.
Key Risks to Our View:
- Failure to secure a timely charter contract for the second SSAV.
- Our model now assumes the second SSAV is chartered out and deployed by mid-4Q15. A postponement in revenue contribution from this vessel or day rates that are much lower than expected would pose further downside to earnings.
(Suvro SARKAR)
Source: http://www.dbsvickers.com/
