PACC Offshore Services Holdings POSH - Maybank Kim Eng 2016-01-06: Better as a private company

PACC OFFSHORE SVCS HLDG LTD POSH U6C.SI

PACC Offshore Services Holdings - Better as a private company

Since its listing in Apr 2014, stock has been on a downward spiral. On top of missing earnings, the oil service industry downturn has severely affected POSH’s utilisation and charter rates, bringing the latter down by 15-30%. It now trades at 0.3x P/BV and 0.6x our estimated replacement value. With strong financial backing and low trading liquidity, this downturn may just present opportunities to privatise POSH, in our view.
BUY for likelihood to emerge as future winner and de-listing potential.
TP drops to SGD0.47 after our EPS cut for impairment charges, still at 0.5x FY16 P/BV.

POSH was listed in Apr 2014 at SGD1.15/share, raising SGD290m. Parent Kuok Group still owns 81% (incl. Maybulk) of the company.
We estimate that it would require less than SGD150m to snap up POSH’s remaining 346m shares even at a 30% premium.
In fact, POSH could be de-listed if Kuok Group brings its stake above 90%, when it would not make any more sense for investors to hold on to the outstanding 10%.
The company has been buying back its shares. From 11 Aug to 30 Dec 2015, it bought back 7.2m (4%) in 52 of the 104 trading sessions. This may signal privatisation intentions, in our view.

Taking the company private may make it easier for the company to streamline costs and restructure its business in preparation for the next upturn. We believe that POSH has the ability to survive this downturn and emerge a winner in a new cycle as weaker players fail.

Following POSH’s profit warning on 15 Dec 2015, we are incorporating a USD60m impairment charge in our FY15 forecasts. This may be higher if POSH decides to kitchen-sink more charges.
Consequently, our FY15 net profit turns to a loss of USD31m, while TP dips from SGD0.50 to SGD0.47, still based on 0.5x FY16 P/BV.

Privatisation by parent, Kuok Group, due to depressed valuations.
Securing firm charters for its two SSAVs at rates above USD150k/day.
Turns around losses for its 11 Mexico JV vessels which have now been transferred to its full ownership.
Margin surprise from better-than-expected cost cutting.
Demand recovery from an oil-price rebound, accelerated sector consolidation or bankruptcy of peers.

Fails to secure charter for newbuild SSAV Arcadia by Apr 2016 and renew charter for SSAV Xanadu due in Dec 2016.
Utilisation and charter rates deteriorate further or clients back out of committed contracts.
Weak and desperate players undercut on pricing to survive, further destroying industry profitability and extending downturn.

Yeak Chee Keong CFA Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-06

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.47 Down 0.65