Pacific Radiance - UOB Kay Hian 2017-05-18: 1Q17 Management Briefing Takeaways ~ Glimmers Of Improvement Showing

PACIFIC RADIANCE LTD. T8V.SI

Pacific Radiance - 1Q17 Management Briefing Takeaways: Glimmers Of Improvement Showing

Pacific Radiance’s (PACRA) 1Q17 comments painted a picture of higher utilisation against a backdrop of low dayrates.
Utilisation for its Offshore Support Services (OSS) division rose to the mid-30s in 1Q17 (4Q16: ~20%) as expected post monsoon season, while subsea saw a more than twofold jump to 50% in 1Q17 (4Q16: ~20%). However, dayrates remain low and saw minimal improvement, with AHTS rates at US$0.6-0.7/bhp.

Small-mid-sized AHTS are seeing some pick-up in rates, while PSVs rates were remarked at US$9,500- 10,000/day.
Activity in the region picked up, especially for Indonesia.

More enquiries are being made for Subsea, and it appears that 2Q17 might see a sustained utilisation level for PACRA. A large part of 1Q17’s Subsea recovery was due to high utilisation of Crest Odyssey 2 (CO2) during the quarter in Papua New Guinea, with Crest Odyssey 1 (CO1) and Crest Hydra seeing sporadic work.
Based on our tracking, 2Q17 might see a continuation of the performance as CO1 and CO2 have been mobilised for work in Indonesia/Brunei since Apr 17. Crest Hydra remains laid up for now.

Several barges were divested in 1Q17, resulting in divestment losses. However, this freed up capital and reduced associated lay-up fees.
We welcome the move, and note that management is now (finally) considering all possible options. We further note the losses imply that second hand values may have already fallen below PACRA’s vessels’ book value.

As expected, PACRA was a recipient of government financing aid for both SPRING Singapore’s bridging loan scheme (S$15m) and IE Singapore’s internationalisation finance scheme (S$70m). For the former, PACRA has received and used a portion of the S$15m in loans. The latter is technically approved with completion likely by end-May/early-June.
While disbursement of the S$70m is restricted to financing of projects that PACRA undertakes oversees (eg mobilisation fees, etc), this still frees up cashflow that would have been otherwise committed for more immediate needs.
Based on the requirements of the loans and management’s remarks, we suspect that a contract award might be announced in the near term.

PACRA’s cash balance of US$15.2m as of end Mar-17 leaves it in a precarious position, once the net cash outflow of US$27.2m for the quarter is considered.
The government financing aid comes timely, but will likely help bridge funding needs for another quarter or so.
Higher activity will bring in much needed cashflow, but not fully address the cash burn from the idle OSV fleet, which remains significant. Management is taking decisive action to address this and we won’t be surprised if a partner is brought in to inject fresh equity into the company.
While it seems that PACRA is turning the corner, its current cashflow situation is toeing the line on survivability which leaves us fairly hesitant.

Assuming that the oil price environment continues to improve, PACRA should see an improvement in fleet activity that will lift its cashflow.
The introduction of an equity partner (if any) should be considered a positive as it will bring in much needed capital into the company. That said the resultant new share base will likely lower our valuation.
Taking into consideration:
1. the aforementioned statement,
2. PACRA remains operating cashflow negative with no earnings for 2017, and
3. risk of failing is diminishing considering the financing support,
maintain HOLD.
Our target price of S$0.17 is pegged to 0.4x 2017F P/B.
Current valuations of 0.2x 2017F P/B implies possible default and might be overdone considering the glimmer of an improvement of its situation.

Singapore Research UOB Kay Hian | http://research.uobkayhian.com/ 2017-05-18

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.17 Down 0.180