CIMB Securities 2015-08-14: Pacific Radiance - 2Q15; Catch the falling knife. Maintain ADD.

PACIFIC RADIANCE LTD T8V.SI

Catch the falling knife

PACRA posted a core net profit of US$2.5m for 2Q15 (-93% yoy), dissipating fears of a loss-making year.
However, the results trailed our expected US$4m net profit for the quarter, with 1H15 forming just 20% of our full-year forecast.
The OSV arm displayed a certain degree of resilience, but subsea worsened qoq.
We cut our FY15 EPS by 49% as we do not expect it to rebound in 2H.
Also, we now do not expect PACRA to make any vessel sales during the year.
We shave our FY17-18 EPS by 29-38% as we contract our newbuild expectations, and lower our utilisation and margin assumptions.

At 0.5x CY15 P/BV, we lean on the value proposition argument despite the apparent lack of catalysts.
We maintain our Add call, with a lower target price (S$0.81), now based on 1x CY15 P/BV (prev. 7.5x CY16 P/E).
Stronger earnings could catalyse the stock.

PACRA’s OSV arm achieved US$32.7m in revenue in 2Q15, similar to 2Q14 and up 14% qoq, as its new builds which joined the fleet in 1Q managed to secure jobs in 2Q.
OSV achieved a fleet utilisation of 77% in 2Q15 (1Q15: 50%, 2Q14: 85%) and overall 65% for 1H15.
OSV gross margins were also stable, at 40% vs. 42% in 2Q14. YTD, PACRA has taken delivery of seven vessels, of which two PSVs have not been able to secure work due to the severe oversupply.
Having shelled US$130m in 1H15 for vessel additions, PACRA expects to incur another US$90m capex in 2H (for four wholly-owned and one joint-owned vessels) and another US$130m for its FY16 newbuild programme (three joint-owned vessels and three wholly-owned vessels).
Consequently, we project net gearing to increase to 1x at end-FY15 (1H15: 0.8x).
On the other hand, subsea losses widened, with the division just registering a 3% utilisation in 2Q15 vs. 22% in 1Q15.
With the new ROV vessel contributing in 3Q, we expect an incrementally better showing, but not the rebound we had initially expected.

SG&A expenses for 1H15 have been shaved by 27% yoy or S$4.4m cost savings.
Of note, PACRA has revised its depreciation policy and increased the useful lives of certain higher-value vessels from 20 to 25 years.
The policy change has affected about two-thirds of its fleet, and led to a reduction in depreciation charges of S$2.1m (28% qoq drop).

With PACRA anticipated to achieve 4% ROE for FY15, we understand why investors are pricing the stock at 0.5x P/BV.
However, OSV performance has offered scope for optimism that FY16 would be dramatically better, with subsea the wild card.
More importantly, we deem that the stock offers compelling value, at a c.20% discount to conservative liquidation value calculations.

YEO Zhi Bin | http://research.itradecimb.com/ CIMB Securities 2015-08-14

ADD Maintain ADD 0.81 Down 0.85