Maybank Kim Eng 2015-08-13: Pacific Radiance - 2Q15 Missed; Delayed recovery; cut to HOLD.

PACIFIC RADIANCE LTD T8V.SI

Delayed recovery; cut to HOLD

2Q15 missed. Utilisation for subsea at only 3% while that for OSVs rose from 50% to 77%. Cut FY15-17E EPS by 30-64%.
Stable gross margin was due to lower depreciation from restating the useful lives of vessels.
TP cut from SGD0.80 to SGD0.42, now at a lower 0.5x FY16E P/BV.
No catalysts despite depressed valuations.
Downgrade to HOLD.

2Q15 PATMI of USD3.8m (-87.9% YoY, +325.5% QoQ) is a miss despite sequential growth.
1H15 PATMI of USD4.7m (-90.6% YoY) formed only 13/14% of our/consensus FY15E.
The subsea division remains the key drag with only 3% utilisation in 2Q15.
The silver lining is that utilisation for OSVs improved to 77% in 2Q15 vs 50% in 1Q15.
Headline gross margin of 29.2% looks stable but was mainly due to restating the useful lives of 60% of its vessels from 20 to 25 years thus reducing depreciation charge by USD2.6m in 2Q15.

Management has toned down expectations, guiding for 2016 recovery instead of 2H15.
It still believes that subsea-related maintenance work cannot be deferred indefinitely.
Some subsea competitors such as Halin and Caldive have left the market, and it sees stronger opportunities when the market turns.
But, we do not expect to see any material turnaround until 2016, as only one ROV is working while the two DSVs remain uncontracted. It expects OSV utilisation to be sustained at 70-80%.
We cut FY15/16/17E EPS by 64/63/30% as we bring rates and utilisation down further.
Net gearing has risen from 0.43x to 0.80x and it’s likely to rise further as it draws down loans for capex of outstanding vessels.
We now forecast negative FCFs for FY15-17E.
We cut TP from SGD0.80 to SGD0.42 on lower FY16E P/BV of 0.5x.
Despite trading at a depressed 0.4x FY16E P/BV, we see no stock price triggers in the near term.
Downgrade to HOLD.

Yeak Chee Keong CFA | http://www.maybank-ke.com.sg/ Maybank KE 2015-08-13

HOLD Downgrade BUY 0.42 Down 0.80