PACC Offshore Services Holdings (POSH) - Maybank Kim Eng 2016-05-05: Soldiering on

PACC OFFSHORE SVCS HLDG LTD POSH U6C.SI

PACC Offshore Services Holdings (POSH SP) - Soldiering on

POSH swung from a 4Q15 core net loss of USD1.2m (excl. impairments) to a 1Q16 net profit of USD4.4m. Net profit was in line, at 25% of our FY16E if we add back SGD4.7m of doubtful debts provision.
Still, our above consensus forecast is contingent on its second SSAV, POSH Arcadia contributing by Sep 2016.

Nevertheless our key thesis is less focused on short-term EPS, but anchored on the view that it would emerge a future winner.
POSH has the lowest balance sheet risk among oil services stocks under our coverage.
Cut FY16/17/18E by 22%/5%/2% on rates and utilisation adjustments, where FY16E’s change was largely to factor in the doubtful debts.
Maintain BUY and TP of SGD0.42, at 0.5x FY16E P/BV which is based on GGM (LT ROE 6%, COE 12%).

1Q16 OSV utilisation was stable QoQ at 67% (4Q15: 67%, 1Q15: 82%), which was respectable considering that some OSV peers achieved only 30% in 4Q15.
But gross profit dipped sequentially to a minor loss, suggesting that it has sacrificed on margins.
OA segment was stronger from full contribution of high-margin POSH Xanadu and three LCVs, thus sustaining overall GPM at 24%.
The business still generated USD70m of op. CF in FY15 and another USD20m of op. CF in 1Q16. It has outstanding capex of USD145m, of which USD121m would be paid in FY16. This should allow it to easily turn FCF positive in FY17E.

Despite the challenging market, POSH has been securing new contracts:
1. Apr 2016: Secured USD167.5m 5-year firm charters for 8 OSVs with Middle Eastern NOC,
2. Mar 2016: Renewed POSH Xanadu with Petrobras,
3. Feb 2016: Secured USD85m 5-year firm charters for 5 OSVs with Middle Eastern companies.
This should sustain utilisation to support the company through the downturn.

Our view that POSH will be a definite survivor remains unchanged. This is supported by its strong balance sheet, with 0.5x net gearing and funding access of SGD1b at < 2% interest rates.

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/ 2016-05-05

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 0.42 Same 0.42