DBS Vickers 2015-08-05: PACC Offshore Services Holdings - 2Q15 Results. OSV division in the red. Maintain HOLD.

OSV division in the red

Earnings dragged down by losses at OSV segment.
Accommodation division performs well, provides recurring earnings base from long-term contracts.
Further delays expected in contract of 2nd SSAV though, by our estimates.
Maintain HOLD with lower TP of S$0.41.

Revenues were up by 22% y-o-y to US$71m owing to the maiden contribution of two key vessels in the accommodation segment, but net profit fell 49% y-o-y to US$6.1m as the OSV division recorded losses during the quarter.
The poor results from the OSV division in 2Q15 – despite decent utilisation of 79% - was due to mobilisation and start-up costs involved in redeploying four of the erstwhile Mexican vessels to other locations, as well as weak charter rates and high repair costs on some vessels.

2Q15 was the first full-quarter contribution from the first SSAV – POSH Xanadu – working with Petrobras in Brazil.
The vessel has had 100% uptime to date and has been receiving prompt charter hire payments.
The other new vessel to contribute was the 238-man Light Construction Vessel (LCV) POSH Endurance, which is working in SE Asia on a long-term contract.
The accommodation division saw revenue almost triple from 2Q14 levels and gross margins were a healthy 50%.

With the continued oil price volatility, POSH will have to grapple with falling charter rates and lack of contract opportunities, especially for its AHT and AHTS fleet.
The erstwhile Mexican JV vessels are an additional drag on profitability.
Only the accommodation market holds some promise, as POSH was able to secure long-term contracts in SE Asia and the Middle East for three of its 238-man LCVs. SSAVs – high-risk, high-return component.
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 the delivery of the two SSAVs and there is still no visibility on contract for the 2nd SSAV. As such, we push deployment of the 2nd SSAV from 4Q15 into FY16 now.
For the first SSAV, we expect lower charter rates if and when the contract with Petrobras is renewed next year.

We cut our day rate and margin assumptions further for OSV and shallow water T&I segments as trends have been weaker than earlier expected.
We also assume lower contributions from SSAVs in FY15/16, as described above.
Factoring these in, we cut FY15/16 net profit estimates by 52%/43%.

Despite the lack of earnings growth in FY15, we maintain our HOLD call, as earnings are likely to improve from next quarter with the absence of one-off costs in OSV division, as well as additional contribution from new LCVs in accommodation division.
This could lend some support to POSH's share price.
Our revised TP of S$0.41 is based on 0.6x FY15 P/BV, in light of below-par ROE expectations for POSH of c.2-3% in FY15/16 and increasing earnings uncertainty amid the industry downturn and volatile oil prices. (prev S$0.50)

The two SSAVs account for more than half of projected profits by FY16, so delays in start of charters could hurt earnings significantly.
Although the first SSAV has been contracted out to Petrobras for work starting end-1Q15, the second SSAV is yet to be contracted.
Utilisation of low-end vessels declining. POSH recorded low utilisation of its AHT vessels and barges under its shallow water T&I segment.
The competitive environment and low numbers of offshore platform installations are expected to cap earnings from this segment.

Analyst: Suvro SARKAR

Source: http://www.dbsvickers.com/