Pacific Radiance - CIMB Research 2017-08-14: 2Q17 Balance Sheet Weakness Still A Concern

Pacific Radiance - CIMB Research 2017-08-14: 2Q17: Balance Sheet Weakness Still A Concern PACIFIC RADIANCE LTD. T8V.SI

Pacific Radiance - 2Q17: Balance Sheet Weakness Still A Concern

  • Pacific Radiance (PACRA)'s 1H17 core net loss of US$23.8m was in line with our expectations (full-year net loss forecast of US$46m) but higher vs consensus (FY17F net loss forecast of US$37m).
  • Utilisation rates have improved in 2Q17, but DCRs were stickily low hence leading to another sequential GP loss, albeit a narrower one.
  • PACRA guided it had appointed advisors to review its capital structure and to develop feasible restructuring plan. This meets our expectation of a cash call/M&A or CSE exercise.
  • Maintain Reduce with a new TP of S$0.073 based on a lower FY17F P/BV of 0.15x (from 0.20x previously) slightly below -1 s.d.P/BV of 0.18x.

Vessel utilisation and DCRs still weak, losses continue 

  • 2Q17 revenue of US$17.5m (-12.5% yoy; +25.3% qoq) whilst higher, was insufficient to lift the company out of gross loss position (-US$0.96m) on account of still significantly low daily charter rates (DCR). 
  • Qoq utilisation rates improved largely due to the OSV segment to 56% (mid-30s in 1Q17) and sustained subsea utilisation at 50% vs. 50% in 1Q17.

Some future hope, but low DCRs remain key overhang 

  • PACRA guided that customers are awarding more contracts, especially from Indonesia, India and Middle East and maintains there are subsea awards but these are mainly short term of 3-6 months’ duration. 
  • We expect the subsea segment to chart lower utilisation in 3Q17 as the contracts expire, whilst OSV segment could hold until 3Q17F but trend down again in 4Q17 in the monsoon season. 
  • Rates are guided to still be low, counter-weighing the slight utilisation improvements.

Weak operating cashflow and balance sheet still key concerns 

  • PACRA has tapped both the SPRING and Internationalisation Finance Scheme (IFS) aid schemes, as such 2Q17 cash position was healthier at US$36.3m vs. US$15.2m at end- 1Q17. However, these are little relief given that PACRA continues to churn negative operating cashflows (US$10.4m in 2Q17) and has a gross debt exposure of US$523m which includes a bond worth S$100m due Aug 18.

Financial restructuring underway 

  • We had previously guided that PACRA may have to embark on a cash call, M&A exercise or a consent solicitation exercise (CSE) given its weak cash position and impending bond maturity. 
  • In its 2Q17 results it guided that it has appointed advisors to assist in reviewing its overall capital structure, and is looking to develop a feasible restructuring plan that will allow the group to sustain its operations going ahead. No timeline was guided on the completion of this exercise.

Maintain Reduce with lower TP of S$0.07 

  • We remain cautious on the stock given the impending near-term restructuring. Our new TP of S$0.07 (from S$0.106) is based on a lower FY17F P/BV of 0.15x (slight discount from the -1 s.d. of 0.18x). 
  • We would review our call upon the successful resolution of its restructuring exercise; but share price could be volatile and erratic till then, in our view.

Upside catalysts are a successful restructuring exercise and better-than-expected vessel utilisation.

  • PACRA’s share price and valuations have been trending downwards due to its weak profitability and balance sheet position. 
  • Going forward, we believe it will continue to be capped by the current impending financial review. 
  • We note that historically, companies undergoing financial restructuring could trade at the 0.10- 0.20x P/BV range before their restructuring completes. These could be the valuations PACRA would trade at until it successfully completes its financial restructuring, in our view.

Cezzane SEE CIMB Research | LIM Siew Khee CIMB Research | 2017-08-14
CIMB Research SGX Stock Analyst Report REDUCE Maintain REDUCE 0.073 Down 0.110