Pacific Radiance - CIMB Research 2017-05-18: 1Q17 Earnings Still Lag, Cash Flow Risks Persist

Pacific Radiance - CIMB Research 2017-05-18: 1Q17: Earnings Still Lag; Cash Flow Risks Persist PACIFIC RADIANCE LTD. T8V.SI

Pacific Radiance - 1Q17: Earnings Still Lag; Cash Flow Risks Persist

  • PACRA's 1Q17 net loss missed expectations at 37%/39% of our/consensus FY17F net loss forecasts (US$39.9m/US$37.9m).
  • 1Q17 miss due to lower revenue, associate/JV contributions & higher interest cost.
  • Utilisation rates improved qoq, but daily charter rates (DCR) were still low in 1Q17.
  • We trim FY17F-19F EPS by 0.4-15.5%.
  • SPRING and Internationalisation Finance Scheme (IFS) aids help, in our view, but near-term cash flow concerns persist, given cash balance of US$15.2m in 1Q17.
  • Maintain Reduce with lower target price of S$0.11, now based on FY17F P/BV of 0.22x (from 0.25x previously), -1 s.d. below historical mean.

Vessel utilisation and DCRs still weak; Net losses continue 

  • PACRA's 1Q17 revenue of US$14.0m (-23.9% yoy, +15.2% qoq) and EBITDA margin (-32%) remained subdued, pressured by low DCRs that outweighed the qoq improvement in utilisation rates (as per management guidance, in 1Q17, OSV: mid-30%, subsea: 50% vs. in 4Q16, OSV: slightly above 20%, subsea: slightly above 20%). 
  • Higher-than-expected interest costs and slight JV loss (-US$0.09m) did not help bottomline, resulting in core net loss of US$14.6m in 1Q17.

Some hope for future, but low DCRs continue to cause overhang 

  • PACRA guided that customers are awarding more contracts especially in Indonesia, India and the Middle East. It also maintains that subsea awards would emerge by 2H17F, with charters mainly for durations of 3-6 months. 
  • Management estimates this would keep overall utilisation rates steady for FY17F. However, guides for rates to stay low in FY17F, Hence, we believe the steady improvement in utilisation will continue to be offset by low DCRs in 2017F, at least.

Secured government aid alleviates some cash flow pressure 

  • PACRA has tapped SPRING for S$15m aid and received approvals for S$70m aid from the International Enterprise (IE) Internationalisation Finance Scheme (IFS). Funds have been drawn from the SPRING fund and for IFS it awaits final agency approval, likely by end-May/early Jun. The aids provide much-needed relief, given PACRA’s negative operating cash flow of US$13.1m in 1Q17.
  • The SPRING aid is only for working capital whilst IE funds can be used for asset-based, project and M&A financing according to IE.

Cash remains tight; Cash call and CSE not ruled out 

  • The government aids do help PACRA but we do not rule out a cash call or M&A exercise in the near future, given the company’s cash balance of US$15.2m (excluding cash pledge of US$8.4m) at end-1Q17, offers a very narrow buffer. 
  • In the medium term, we also believe PACRA may undertake a consent solicitation exercise (CSE), given that it has bonds of S$100m maturing in Aug 2018F.

Trim FY17F-19F EPS by 0.4-15.5% 

  • We trim FY17F EPS by 15.5% to account for lower revenue, JV and associate contributions, as we believe PACRA’s losses would only narrow in 2H17F when more contracts emerge. 
  • We keep FY18-19F EPS largely unchanged, pending further management guidance on utilisation trends.

Maintain Reduce with slightly lower target price of S$0.11 

  • We stay cautious on PACRA in the near term, given the heightened cash flow risks (derating catalyst), which may outpace the positive impact of vessel utilisation improvements. 
  • Upside risks to our call are swifter improvement in vessel utilisation. 
  • Our new target price of S$0.11 is based on FY17F P/BV of 0.22x (below 0.25x previously), -

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2017-05-18
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.11 Down 0.130