PACC Offshore Services Holdings - DBS Research 2017-11-14: Losses Should Start To Reduce

PACC Offshore Services Holdings - DBS Vickers 2017-11-14: Losses Should Start To Reduce PACC OFFSHORE SVCS HLDG LTD. U6C.SI

PACC Offshore Services Holdings - Losses Should Start To Reduce

  • 3Q17 results lag expectations on higher-than anticipated costs and later contract start dates.
  • 4Q17 should be stronger; SSAV POSH Arcadia to see full quarter of utilisation and more OSVs on long-term contracts in the Middle East will be deployed.
  • 9M17 OCF is positive at US$22.4m, no liquidity or solvency risks on the horizon.



Maintain BUY: POSH is the safer bet to ride on the oil price recovery. 

  • 3Q17 earnings came in below expectations – a combination of start-up costs for the POSH Arcadia, higher-than anticipated opex for other idle accommodation vessels, and late commencement of contracts of some of the OSVs on long-term contracts in the Middle East. 
  • OSV day rates declined slightly during the quarter, though going forward we see limited downside to rates as the offshore industry recovers. In the near term, we see a stronger quarter in 4Q17 as the POSH Arcadia gets a full quarter of utilisation, and more of the Middle East OSVs are deployed. 
  • We continue to see POSH as a name to ride the gradual offshore service sector upturn; its share price has historically been strongly correlated with oil prices, which are rising again. 
  • Further, POSH has no bonds outstanding, is cash generative with positive OCF in 9M17, and remains a privatisation candidate with Kuok (Singapore) Ltd as the majority shareholder (81.89% ownership).


Where we differ: 

  • We believe the OSV market has bottomed, and POSH is poised to ride the gradual upswing. 
  • Additionally, we think the market has overlooked the fact that POSH made the largest impairments as a percentage of fleet assets over FY15/16 (c.32% of fleet value). Its equity base is thus more eroded, and P/B valuation looks inflated vs. peers, but is not.


Potential catalyst: 

  • We think POSH’s SSAVs can earn > US$3m in gross profit per quarter each if fully utilised. Thus their earnings potential is large, and SSAV contract wins are a key catalyst.


Valuation

  • We maintain our BUY call with an unchanged TP of S$0.41 (pegged to 0.8x P/B). 
  • Earnings were lowered on higher-than-expected costs on idle vessels, and factoring in a slower-than-anticipated recovery in day rates.


Key Risks to Our View

  • Failure to secure/extend charter contracts for the SSAVs. There could be downside risk to earnings if further contracts fail to materialise for POSH’s two SSAVs.


WHAT’S NEW - 4Q17 should be better on higher contribution from key contracts 


3Q17 results came in below expectations on a weaker-than-expected Offshore Accommodation (OA) segment. 

  • Net loss came in at US$9.8m (vs. our expectation of US$5.7m loss). This was primarily because gross profit for the Offshore Accommodation segment remained in the red (while we expected positive profits) despite POSH’s second SSAV being on-hire during the quarter. This was a combination of
    1. startup costs incurred on the Arcadia for the Prelude job;
    2. the Arcadia only being on-hire from mid-August, hence did not contribute a full quarter’s worth of profits; and
    3. higher depreciation on the segment taking delivery of one IMR vessel and one MPSV from the newbuild pipeline. 
  • 4Q17 looks to be a better quarter for the segment, with the absence of one-off start-up costs, and a full quarter’s utilisation of the Arcadia.

OSV segment also missed our expectations slightly – 

  • While we expected a turn to minor gross profits in 3Q17 on newly deployed vessels to the Middle East (utilisation is now 72% for the OSVs), the segment remained in a minor gross loss position of US$0.2m – essentially flat q-o-q. This was due to slower-than-forecasted deployment of vessels on long-term contracts to the Middle East (though all 12 should be on-site by year-end) as well as a slight downward adjustment of day rates on other vessels. 
  • Going forward, we think higher workload on the Middle East OSVs as they enter service should help give OSV segment margins a boost.

Strong contribution from Associates/JVs

  • Strong contribution from Associates/JVs helped to offset the lower-than-expected gross profits, contributing US$11.8m for the quarter – about 2.5x higher q-o-q – as towing JV POSH Terasea saw high workload during the quarter related to the Prelude FLNG project for Shell (which the SSAV Arcadia is also working on). 
  • POSH Terasea should again see robust workload in 4Q17 on towage work for the Egina FPSO from South Korea to Nigeria.

Cash flows remain healthy, which is key in this environment.

  • OCF was a positive US$10.8m for the quarter on positive working capital contribution. Pre-working capital OCF was also positive. Finally, OCF is positive US$22.4m on a 9M17 basis.
  • Net gearing ticked up to 1.14x as of 3Q17 on
    1. increase in gross debt of US$15.5m (expected – to fund newbuild vessel deliveries: one MPSV, one IMR vessel and two AHTS vessels were taken delivery of during the quarter for cash outflow of c.US$32m); and
    2. on a lower equity base due to bottom-line losses.

Undrawn bank facility quantum increases 28% q-o-q. 

  • POSH’s undrawn bank lines stood at US$318m as of 3Q17 – up from US$249m the previous quarter. New banking facilities were secured during the quarter, which is a positive signal regarding banks’ lending appetite towards POSH. 
  • Strong parentage in the form of Kuok Group is a plus.




Suvro SARKAR DBS Vickers | Glenn Ng DBS Vickers | http://www.dbsvickers.com/ 2017-11-14
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.410 Same 0.410



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