Pacific Radiance - CIMB Research 2015-11-13: Vessel disposals save the day

PACIFIC RADIANCE LTD PACRA T8V.SI

Pacific Radiance - Vessel disposals save the day

3Q15 core net profit of US$3.5m was below expectation and consensus.
Vessel disposals saved the day as OSV utilisation dropped to 64% in 3Q (2Q: 77%).
Interest coverage for 9M15 was 4.1x, above the requirement of 3x.
FY15-17F EPS slashed by 38-66%, and FY15-17F DPS by 50-63%
Maintain Add with lower target price, now based on 0.5x CY16 P/BV

At 21% of our full-year forecast, PACRA’s 3Q15 core net profit of US$3.5m (-74% yoy, +25% qoq) was below our expectation and consensus.
The negative deviation stemmed from higher interests costs and lower associates’ contributions. If not for the US$6.6m in disposal gains from two vessels in 3Q, the group would have just broken even at the EBIT level.

Chartering EBITDA of US$8.4m was lackluster (-21% qoq; -16% yoy).
3Q represented PACRA’s worst operating performance of the year. The cause was lower OSV utilisation of 64% as vessels came off contracts (2Q15: 77%; 9M15: 65%).
The OSV shortfall was partially made up by stronger subsea utilisation of 32% (2Q15: 35; 9M15: 21%) as the ROV support vessel was gainfully employed.
With more subsea tenders on the horizon, management is sanguine that subsea fortunes will turn for the better in 2016.

Management shared that it was not affected by the recent blocking in Brazil. Under Brazilian laws, foreign tonnage can be “blocked” from its waters when a local-flagged of similar specs. is available. PACRA has one AHTS servicing Petrobras, but that is a customized and specialized one. We deem that the more widely supplied PSVs would be at risk of being blocked.
PACRA has another tug & barge set in Brazil, but that is with the private market.

Net gearing stayed at 0.8x (2Q15: 0.8x; FY14: 0.5x). YTD, PACRA has incurred c.US$140m in capex and is expected to incur another US$130m-US$150m for the progressive deliveries of 6-7 vessels.
We forecast net gearing to hover at 0.9-1x for FY16-17. Depending on market conditions, PACRA may also defer some deliveries.

We slash our FY17-18 EPS b 56-66% owing to lower utilisation assumptions and delay in newbduildings’ contributions. As a result, we also cut our FY15-17 DPS by 50-63%.
We now expect DPS of 0.5-1Scts for FY15-17 (prev. 1-2Scts DPS).

Though in our view PACRA provides compelling valuations (trading 33% below liquidation value of S$0.48), we accept that the market, in the short term, would not recognize intrinsic worth until profitability returns.
Rolling over to end-2016 valuations, we now value PACRA at 0.5x CY16F P/BV, as we expect the group to generate 5% ROE for FY17.
We maintain our Add recommendation; potential catalysts include stronger earnings.

YEO Zhi Bin CIMB Securities | http://research.itradecimb.com/ 2015-11-16

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.41 Down 0.81