RHB Securities 2015-08-14: Pacific Radiance - 2Q15; Turning The Corner. Maintain BUY.

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PACIFIC RADIANCE LTD T8V.SI

Turning The Corner 

• Pacific Radiance reported a USD3.8m PATMI for 2Q15. 
• Maintain BUY, with a lower SGD0.66 TP (74% upside, from SGD0.83) based on a 0.8x P/BV. 
• Utilisation rates for its OSV and tugs & barges units improved, but the subsea vessels hardly saw work. 
• The company adjusted its depreciation policy to match normal industry practices, which is acceptable in our view. 
• Sentiment on the stock has declined, and it is trading at 0.5x P/BV, which we believe is too large a discount. 

 1Q15 the earnings trough. 

• Pacific Radiance (Radiance) recorded mixed utilisation rates in 2Q15, with the offshore support vessels (OSVs)/subsea vessels/tugs & barges divisions registering 77%/3%/64% utilization rates vs 50%/22%/30% in 1Q15. 
• Management reported the OSV divisions’ gross margins at 40%, ie just a mere 2ppt lower than 2Q14 even on lower charter rates. 
• We believe it has turned the corner – the subsea division can approach a breakeven level through rapid down manning and/or warm-stacking the vessels in 2H15. 

 Normalising depreciation policy. 

• The company adjusted its depreciation policy from 20 years for all vessels, to up to 25 years for the larger, more sophisticated vessels. 
• As the industry generally uses a 20- to 25-year depreciation timeframe, we think this move merely moves the company from having a highly-conservative policy to a normalised one. 

 Subsea vessel utilisation rates a big swing factor. 

• We estimate that the diving support vessels cost it USD17m-23m per year with utilisation rates at c.10% vs previously-assumed breakeven rates of 40-50%. 
• While we earlier hoped that pent-up demand for maintenance services will come through in 2H15, we now delay these expectations to 1H16. 
• We also cut vessel sale gains to nil from USD10m/15m for FY15F/FY16F. 
• Together, these leads to us slashing estimates by 66%/52% for these years. We also introduced FY17 estimates in this report. 

 Down but not out. 

• Radiance has proven it can maintain profitability even in what is likely the worst oil market downturn in decades. 
• We believe this asset-heavy company may deserve a discount to book value while the outlook remains so uncertain (and ROEs are at 2-8%), but a 50% discount appears to impute a capitulation in sentiment. 
• Long-term investors are likely to realise above-average returns from this entry point.

Lee Yue Jer CFA | http://www.rhbgroub.com/ RHB Securities 2015-08-14

BUY Maintain BUY 0.66 Down 0.83