UOB Kay Hian 2015-08-14: Pacific Radiance - 2Q15; In The Black Despite A Challenging Environment. Maintain BUY.


2Q15: In The Black Despite A Challenging Environment 

  • We had earlier cut our 2015 earnings forecast in expectations of of poor results on low DSV utilisation. 
  • 2Q15 net profit came in ahead of our expectation. Sequentially, OSS utilisation improved while DSV utilisation deteriorated. 
  • G&A expenses fell 31% yoy. 1H15 earnings have likely bottomed. The funding for an outstanding capex of US$220m is secured. 
  • We expect net gearing to remain at 0.8-0.9x in 2015-16 before falling sharply in 2017. P/B is at cyclical trough. 
  • Maintain BUY. Target price: S$0.96. 


• In the black. 

  • Pacific Radiance reported a net profit of US$3.8m for 2Q15, down 88% yoy. But net profit of US$4.7m for 1H15 was ahead of our expectation of zero profit to a slight loss. We had earlier flagged 2Q15 poor performance and cut our 2015 net profit accordingly to US$10m after we learnt its subsea segment registered zero utilisation (actual utilisation was 3%). 

• Poor DSV utilisation weighed on earnings. 

  • Revenue fell 29% yoy from US$48.7m in 2Q14 to S$34.8m in 2Q15. The decline was attributable mainly to the 97% yoy decline in revenue of the subsea segment from US$14.0m in 2Q14 to US$0.4m in 2Q15. Utilisation of the diving support vessel (DSV) fleet fell to 3% (1Q15: 22%, 2014: 51%). Separately, the offshore support vessel (OSV) segment saw a marginal revenue decline of 3% from US$33.8m in 2Q14 to U$32.7m in 2Q15. Utilisation of the OSV fleet was 77% (1Q15: 51%, 2014: 74%). On a qoq basis, OSV utilisation improved while DSV utilisation deteriorated. Pacific Radiance’s DSV fleet comprises two DSVs and one remotely operated vehicle (ROV) support vessel. The ROV support vessel has now secured a job for 3Q15. The group is currently tendering jobs for its DSVs. 

• But gross margin remained high. 

  • While gross profit was down 55% yoy on a 29% yoy fall in revenue, gross margin of 29% (2Q14: 47%) is still good in view of the very low DSV utilisation and compared with the gross margins achieved by other offshore support vessel (OSV) owners in today’s challenging operating environment. • Substantially lower gains from vessel sales. Other operating income fell 86% yoy from US$20.2m in 2Q14 to US$2.7m in 2Q15 due to the absence of gains from vessel sales. 2Q14 recorded a large gain of US$18.1m from vessel sales. 

• Cutting costs furiously. 

  • 2Q15 G&A expenses declined 31% yoy from US$7.9m to US$5.5m (due to lower staff cost) while other operating expenses fell 94% yoy from US$3.5m to US$0.2m (due to lower forex losses). Separately, Pacific Radiance revised the useful lives of certain types of vessels from 20 to 25 years after conducting an operational and sector review of each category of the vessels’ useful lives. This led to a US$1.5m reduction in depreciation. 

• Capex and balance sheet. 

  • Net gearing currently stands at 0.8x. Under Pacific Radiance’s capex programme, five and six vessels will be delivered in 2H15 (1H15: 7) and 2016 respectively. The outstanding capex yet to be paid is US$220m, of which US$180m will be funded by equity of US$40m and bank loans that have been secured. Of the US$220m outstanding payments, US$90m will be incurred in 2H15, assuming vessel deliveries are not deferred. With US$77m cash in hand, Pacific Radiance has the ability to fund its capex programme. We expect net gearing to remain at 0.8-0.9x in 2015- 16 before falling sharply in 2017. 


• At cyclical trough valuations. 

  • Pacific Radiance is trading at cyclical trough valuation at 0.4x 2015F P/B. This is below the OSV-owner segment’s cyclical P/B trough of 0.5x during the Great Recession in 2008-09, which saw Brent oil price falling below US$40/bbl. 


  • We raise our 2015-16 net profit forecasts by 35% and 3% respectively, primarily due to lower costs. 
  • Risks. Lower-than-expected charter rates, vessel sale gains, poor subsea performance and delayed deployment of new vessels. Pacific Radiance will be taking delivery of 12 new vessels in 2015 and 6 in 2016. Its fleet size was 58 vessels as of end-14. 


• Deep in value, awaiting share price catalysts. 

  • We tweak our target price from S$0.95 to S$0.96, based on 2016F P/B of 1.0x (premised on Brent at US$70/bbl). 

• Maintain BUY. 

  • Given Pacific Radiance’s experienced management, low fleet cost and its positioning predominantly in shallow-water production, we expect it to ride through the current stormy environment. 


  • A rebound in oil prices. 
  • Quarterly earnings recovery amid the industry downturn.

Nancy Wei | Foo Zhiwei | http://research.uobkayhian.com/ UOB KH 2015-08-14
BUY Maintain BUY 0.96 Up 0.95