PACC Offshore Services Holdings - DBS Research 2018-02-22: SSAV Contracts Should Support Sentiment

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PACC OFFSHORE SVCS HLDG LTD. U6C.SI

PACC Offshore Services Holdings - SSAV Contracts Should Support Sentiment

• Impairments of c.US$180.5m (of which US$15.5m were at the JV level) taken in 4Q17, depressing headline profits.
• SSAV POSH Arcadia’s contract extended; POSH Xanadu secures contract for Chevron beginning in 1Q18.
• OSV utilisation rate down q-o-q to 61% in 4Q17 but should improve hereon.

Maintain BUY; 4Q17 results were a net positive. 

• The announcement of POSH Xanadu SSAV securing a contract with Chevron starting in 1Q18 and the second SSAV Arcadia’s extension of its Prelude contract until 2Q18 were key positives this quarter, and point to healthy 1H18 gross profits from the accommodation segment. 
• Meanwhile, management sounds more sanguine on workload potential from maintenance requirements in 2018, which could help buoy some of the smaller sub-segments such as the light construction vessels (LCVs). 
• Despite a rise in net gearing to c.1.6x owing to further impairments taken, POSH’s positive OCF, strong parental backing by Kuok Group, lack of bonds outstanding, and undrawn bank facilities of c.US$133m give us comfort; we see POSH as a name to ride the gradual OSV recovery.

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 FY15-17 (c.44% of fleet value). Its equity base is thus more eroded, and P/BV valuation looks inflated vs. peers, but is not.

Potential catalyst: 

• Contract wins, especially longer-term ones, for POSH’s semi-submersible accommodation vessels (SSAVs) are a key catalyst, as their earnings potential is large.

Valuation

• With the huge writedowns taken on assets, valuation via P/BV has become more complex, as peers have not impaired their books by similar proportions. We adjust for POSH’s aboveaverage impairments, implicitly assuming POSH has taken impairments in line with the high end of peers' c.30% of FY14 (pre-oil crisis) asset value. We thus obtain a P/BV peg of 1.4x.
• Rolling our numbers to FY18, our Target Price is reduced slightly to S$0.48. Maintain BUY.

Key Risks to Our View

• Failure to secure or extend charter contracts for the two SSAVs could result in downside risk to earnings.

WHAT’S NEW - Further impairments taken; SSAV contracts a key positive 

Impairments drag down headline numbers… 

• POSH’s 4Q17 headline numbers were dragged down by large impairments of c.US$165m primarily from the OSV and T&I (Transportation & Installation) segments as well as US$15.5m impairments at the JV level, resulting in PATMI losses of US$193m. Core losses in 4Q17 were US$12.1m.

…but core numbers showed some improvement with strong Offshore Accommodation (OA) segment contribution. 

• Overall gross losses shrank q-o-q and y-o-y, with a gross loss of US$1.3m recorded for 4Q17 (vs. US$4.3m gross loss in 3Q17 and US$9.5m gross loss in 4Q16). EBITDA (excluding profit from JVs) also improved to US$9.4m in 4Q17 from US$4.2m in 3Q17 and US$3.3m in 4Q16. 
• The major swing factor in this quarter’s improvement was the Offshore Accommodation (OA) segment, which swung to a gross profit of US$5.2m (highest since 2Q16) as the POSH Arcadia semisubmersible accommodation vessel (SSAV) was on hire for the full quarter, and three out of four light construction vessels (LCVs) were chartered out during the quarter as well (vs. two out of four last quarter).

Contract announcements on SSAVs should boost 1H18 profits. 

• There were two announcements relating to the SSAVs alongside the 4Q17 results: 
  1. POSH announced that its hitherto idle SSAV POSH Xanadu was awarded a contract by Chevron to provide accommodation support for the hook-up and commissioning of Chevron’s Big Foot tension-leg platform in the Gulf of Mexico, with charter commencing in 1QFY18. The length of the charter was not announced. Based on Upstream news on Chevron’s Big Foot project, we think the Xanadu contract could last 3-6 months.
  2. POSH’s second SSAV POSH Arcadia also had its contract extended into 2Q18 (from ~1Q18 earlier) Given that both SSAVs will now be working concurrently in 1Q/2Q18 (albeit maybe not for the full quarters), we believe the OA segment will maintain its profitability on a gross level in 1H18.

OSV segment numbers disappoint, but mostly due to one-off cost items. 

• OSV segment utilisation decreased to 61% this quarter, down from the high of 72% last quarter, as some AHTS vessels that were assisting with the Prelude job in 3Q17 were no longer on hire. Some of the newbuild OSVs on longterm contracts in the Middle East were also not deployed as quickly as we had assumed, but deployment of these over 1Q/2Q18 should help boost utilisation and profits slightly.
• Overall, day rates remained depressed. Gross loss from the segment was c.US$6.1m, but we believe US$3-4m of this was due to mobilisation and outfitting costs, so in effect gross losses were US$2-3m or so – in line with the last few quarters’ average.

Good run for JV profits in 2017, but less visibility in 2018.

• Excluding the US$15.5m impairment at the JV level, profit from JVs for 4Q17 would have been c.US$5.9m, marking the third consecutive profitable quarter for JVs (of which POSH Terasea, a towing service specialist, is the largest). 
• POSH Terasea commenced towage of the Egina FPSO from South Korea in 4Q17, which helped boost JV profits for the quarter. POSH Terasea had also been supporting the Prelude project around 2Q/3Q17, which helped boost full-year FY17 JV profits (ex-impairments) to a high of US$18m. However, with no major support work announced on large projects in 2018 so far, we see downside risk to JV earnings y-o-y.

Net gearing now at 1.6x due to impairments. 

• Owing to the large write-offs this quarter, net gearing has risen from 1.14x as of 3Q17 to 1.63x currently. However, POSH is still operating cash-flow (OCF) positive for FY17 with c.US$20m in OCF, and has undrawn bank lines of c.US$132.6m that it can potentially tap upon. 
• Only one newbuild vessel remains on the orderbook for c.US$14m in capex outstanding.

Suvro Sarkar DBS Vickers | Glenn Ng DBS Vickers | http://www.dbsvickers.com/ 2018-02-22

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.48 Down 0.510