Offshore & Marine - UOB Kay Hian 2016-08-01: Delaying The Inevitable

Offshore & Marine - UOB Kay Hian 2016-08-01: Delaying The Inevitable Offshore & Marine PACIFIC RADIANCE LTD T8V.SI  EZRA HOLDINGS LIMITED 5DN.SI 

Offshore & Marine Singapore - Delaying The Inevitable

  • The turnaround by Swiber from liquidation to judicial management only delays the inevitable cascade defaults within the sector. 
  • A prolonged longer oil price environment and recent spate of poor earnings from oil majors will prevent the much-needed rise in service price required for the sector to make a turnaround. 
  • We analyse the entire SG O&G market and flag companies at stress. With liquidity pressure in the sector mounting amid a prolonged downturn, we downgrade the sector to UNDERWEIGHT.



WHAT’S NEW


From liquidation to judicial management. 

  • In a dramatic turnaround, Swiber made a late night announcement on 29 July that it would now place itself under judicial management, instead of liquidation. This was done at the behest of its major financial creditor.

Pacific Radiance makes provision for receivables due from Swiber. 

  • Separately, Pacific Radiance announced that it was providing US$10.1m in respect of doubtful receivables owing to Swiber’s related entities. The provision is likely to further impact Pacific Radiance’s earnings negatively, which had already reported a loss of US$4.6m in 1Q16.



STOCK IMPACT


Delaying the inevitable. 

  • While a judicial management order provides temporary relief, it is only valid of 180 days unless extended by the courts. Even if oil prices rise, a recovery in earnings is not to be expected as service prices remain depressed. Service prices need to rise in order for companies to repair their balance sheet. However, the latest string of earning misses amongst the supermajor oil companies will likely keep it depressed for longer. As such, a judicial management order only delays the inevitable series of cascade defaults necessary to repair the sector.

Cross-transactions amongst companies a risk. 

  • While market has been overly focused on the credit health of various Offshore Marine (O&M) companies, Pacific Radiance’s receivables provision brings to light the issue of non-publicly disclosed cross-transactions amongst the Singapore O&M companies. The notion of a large number of unknown unknowns poses a serious threat to our investment thesis for companies within the sector.

Highlighting companies with financial concerns. 

  • Based on an analysis of O&M companies within the Singapore space, we identify companies that are facing significant financial concerns. These companies are determined based on their net gearing, their cash position relative to current liabilities, erosion in cashflow via T12M EBITDA being greater than 50%, and our own measure of whether a strong shareholder is able to inject equity into the company if needed. This is overlaid with a matrix showing the principal bankers for each company. 



ACTION


Downgrade to UNDERWEIGHT. 

  • Banks’ ability to continually float companies if the downturn prolongs is now seriously questioned. Without their support, companies are likely to run into cashflow concerns that either sees them default, or require capital raising. 
  • Cashflow is not expected to improve as long as service prices remain depressed, or companies take drastic cost-cutting measures to improve it. 
  • Given the rising threat from this unexpected turn of events, we turn negative on the sector, and downgrade to UNDERWEIGHT. 
  • On these concerns, we downgrade the following to SELL:
  • EZRA SP (DOWNGRADE TO SELL, TP: S$0.026) – Lowered to 0.1x 2017F P/B, from 0.3x.
  • PACRA SP (DOWNGRADE TO SELL, TP S$0.15) – Lowered to 0.2x 2017F P/B, from 0.5x.




ANALYSING O&M COMPANIES BY THEIR FINANCIAL HEALTH








Foo Zhiwei UOB Kay Hian | Andrew ChowCFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-01
UOB Kay Hian Analyst Report SELL Downgrade BUY 0.15 Down 0.48
SELL Downgrade HOLD 0.026 Same 0.064


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