Pacific Radiance (PACRA SP) 2Q15 Results Preview: Possibly The Worst Quarter On Zero DSV Utilisation
- We expect 2Q15 to be the worst quarter, with DSV utilisation at zero.
- OSV activities are recovering on more stable oil prices but E&P spending cuts are hampering a strong rebound.
- Pacific Radiance is deferring some vessel deliveries on top of other cost- reduction measures.
- We cut our 2015-17 net profit forecasts by 75%, 17% and 5% respectively, and lower our target price from S$0.99 to S$0.95.
- Forward P/B valuations are at a cyclical trough. Maintain BUY.
WHAT’S NEW
Zero utilisation for DSV segment in 2Q15.
- From our channel checks with shipbrokers, we learned that Pacific Radiance’s diving support vessel (DSV) utilisation was 0% for 2Q15, vs 22% in 1Q15. The subsea market outlook has become bleak as oil companies continue deferring inspection, repair and maintenance (IRM) work as part of their costcutting drive. Already, the downturn in subsea has driven many established players (Harkand, Halin and Caldive) out of the market.
- Low utilisation of the DSVs in 1Q15 caused earnings to plunge, and we expect 2Q15 performance to be worse.
- The negative impact may be softened by cost savings from warm-stacking of vessels. The silver lining is that activity will eventually return strongly as IRM work cannot be indefinitely deferred due to safety requirements.
Activity is returning, albeit slowly.
- With Brent oil price stabilising at the US$60/bbl level, OSV tender activities are recovering, but for execution in end-15 or 2016. As such, we understand Pacific Radiance only saw a marginal improvement in its OSV utilisation, from 51% to 55%.
- Utilisation for the PSV segment remains lacklustre, with many small PSVs in the segment unable to secure work.
- OSV dayrates have fallen by 10-15% as opportunistic oil companies have requested for sharp discounts of as high as 30%.
- Low activity levels have also impacted demand for newbuild vessels. Management now expects gains from vessel sales to be lower than its previous guidance of US$15m-20m per year.
- While market prices of vessels have fallen, they are still 10% above the group’s newbuild building cost.
Taking delivery of six vessels in 2H15 instead of eight.
- Pacific Radiance is deferring delivery of two vessels in its newbuild programme to 2016, reducing delivery for 2H15 to six vessels. This is in response to the low tender activity for OSV vessels.
- The revised newbuild delivery schedule now stands at 10 vessels for 2015 and 8 for 2016. Ytd, four vessels (3x AHTS and 1x PSV) have been delivered, of which all have secured work save the PSV.
ACTION
Survival of the fittest.
- Despite near-term headwinds (1H15 performance to remain poor), share price has collapsed in tandem with oil prices and the industry downturn. Consensus expects oil prices to rebound by 2016-17. Bloomberg’s consensus median projections for Brent oil price are US$68.40/bbl in 4Q15, US$70.00/bbl in 2016 and US$75.00/bbl in 2017.
2016-17 valuations at cyclical trough.
- Pacific Radiance trades at P/B of 0.6x and 0.5x for 2016 and 2017 respectively. This is close to the OSV-owner segment’s cyclical P/B trough of 0.5x during the Great Recession in 2008-09, which saw Brent oil price falling below US$40/bbl.
We had earlier changed our valuation methodology from PE to P/B.
- With lowearnings visibility in 2015 - implying downside risks to our earnings forecasts - we had earlier switched our valuations from a PE to P/B methodology. We now base our target prices on 1-year forward P/B.
- Traditionally, there is a correlation between P/B valuations and oil prices. We use adjusted regression analysis to set 1-year P/B stock valuations at different oil price levels. US$70/bbl is our base case for Brent crude oil price.
The small/mid-cap oilfield service providers.
- At US$70/bbl Brent oil price, our regression analysis estimates a 1-year P/B of 1.01x for oilfield service providers. The valuation implies that most stocks are trading at an average discount of 30%.
EARNINGS REVISION/RISK
Cutting 2015-17 earnings forecasts.
- We cut our 2015-17 net profit forecasts by 75%, 17% and 5% respectively on: a) lower earnings for its subsea segment, and b) slashing our assumption for gains from vessel sales from US$10m annually to US$1m, US$5m and US$10m in 2015-17 respectively.
Risks.
- Lower-than-expected charter rates, vessel sale gains, poor subsea performance and delayed deployment of new vessels.
- Pacific Radiance will be taking delivery of 10 new vessels in 2015 and 8 in 2016. Its fleet size was 58 vessels as of end-14.
VALUATION/RECOMMENDATION
Deep in value, awaiting share price catalysts.
- We lower our target price from S$0.99 to S$0.95. The change is minimal despite the steep earnings cut as it is based on 2016F P/B of 1.01x, and not on earnings.
- Maintain BUY. Given Pacific Radiance’s experienced management, low fleet cost and its positioning predominantly in shallow-water production, we expect it to ride through the current stormy environment.
SHARE PRICE CATALYSTS
A rebound in oil prices.
Recovery in quarterly earnings amid the industry downturn.
(Nancy Wei, Foo Zhiwei)
Source: http://research.uobkayhian.com/
