DBS Vickers 2015-08-14: Pacific Radiance - 2Q15; Expect no miracles. Maintain HOLD.

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PACIFIC RADIANCE LTD T8V.SI

Expect No Miracles 

Steep fall in earnings potential will affect near-term sentiments. 

• The Group’s OSV fleet utilisation recovered to around 77% in 2Q15 from 50% levels in 1Q15, but it will be difficult to sustain these levels amid the current oil price environment. 
• Day rates have declined by up to 30% for its OSV fleet and further downside can be expected when existing contracts are re- priced. 
• With no immediate recovery in OSV demand expected, we cut FY15/16 earnings by 16%/20% respectively. 
• Core earnings are expected to decline 72% in FY15 and ROEs are expected to remain much below normalised levels. 

DSV fleet is a big drag for now. 

• The Group’s subsea fleet was essentially idle during 2Q15, implying losses for the segment; the two dive support vessels (DSVs) have yet to secure contracts for the rest of the year. 
• While it was a big growth driver when fully employed, the segment looks likely to be a loss leader over the next few quarters, though subsea inspection, repair and maintenance jobs in reality cannot be deferred for ever. 

Watch out for improvements in cost base. 

• While the demand side cannot be controlled, the key for management will be to ensure costs are managed well. Administrative expenses were down 30% in 2Q15, driven by across-the-board reduction in staff costs. Margins were also helped by a change in depreciation policy, extending lives of some vessels from 20 to 25 years. 
• Further cost reductions will be critical in ensuring profitability. 

Valuation: 

• Given the weak results and sub-par returns on capital expected in the near term, we have a HOLD call on the stock with a TP of S$0.42, pegged to 0.5x P/BV. 
• Valuations look cheap but share price performance could be capped by lacklustre earnings performance in subsequent quarters and oil price volatility. 

Key Risks to Our View: 

• Long drawn out oil price crisis could warrant further downside. Oil prices are again trending towards the lows seen in Jan’15 as production worries show no signs of dissipating. 
• There could be risks of counter-party defaults or cancellations on existing charters if the downturn is prolonged.

Suvro SARKAR | http://www.dbsvickers.com/ DBS Securities 2015-08-14

HOLD Maintain BUY 0.42 Down 0.67