Pacific Radiance - Maybank Kim Eng 2015-10-30: Heightened Credit Risks; D/G SELL

PACIFIC RADIANCE LTD T8V.SI

Pacific Radiance - Heightened Credit Risks; D/G SELL

Seeking to amend covenant for its SGD100m 4.3% note. Treading 3x EBITDA interest coverage threshold.
Bond yields have risen to 9.0%. Better to hold bonds.
Cost of capital now higher. Cut GGM TP from SGD0.42 to SGD0.34, now at 0.4x P/BV from 0.5x. Downgrade to SELL.

Pacific Radiance is seeking to amend the covenant for its SGD100m 4.3% note due 2018. It is seeking bondholders’ approval to change the terms such that it would not breach them even if its interest coverage - EBITDA/interest expense - falls below 3x, provided it:
- Deposits the amount of interest for ONE fixed interest period into a reserve account if interest coverage is < 3x but > 1x.
- Deposits the amount of interest for TWO fixed interest periods into a reserve account if interest coverage is < 1x.

This may be read as a pre-emptive measure against possible breaches and to preserve its ability to utilise any future banking facilities.
As at end-2Q15, outstanding capex was USD220m, with USD180m supposed to be backed by secured bank finance, which management clarified is not affected.
Nevertheless, we think that its credit costs and risks have risen, as can be seen from a recent spike in its bond yields from 5-6% to 9%. With oil prices still depressed, OSV sector’s recovery may take longer.
Based on our estimates, the company’s interest coverage borders 3-4x, which makes it highly vulnerable to revenue declines or interest-rate hikes. Net gearing was 0.8x in 2Q15 and may continue to rise if it draws down loans for capex. This could be a non-event if it secures the approval and keeps interest coverage above 3x, but we prefer not to take the risk in the current environment.
We reckon it would be better to hold its bonds which offer 9% yields. We now value the stock at 0.4x P/BV, using a higher 15% COE assumption in our GGM model and average ROE of 6.4%. This cuts our TP from SGD0.42 to SGD0.34.
Downgrade from HOLD to SELL.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2015-10-29

Maybank Kim Eng SGX Stock Analyst Report SELL Downgrade HOLD 0.34 Down 0.42