PACC Offshore Services Holdings - DBS Research 2018-05-09: Bulk Share Disposal Remains An Overhang

PACC Offshore Services Holdings - DBS Vickers 2018-05-09: Bulk Share Disposal Remains An Overhang PACC OFFSHORE SVCS HLDG LTD. SGX: U6C

PACC Offshore Services Holdings - Bulk Share Disposal Remains An Overhang

  • PACC Offshore Services Holdings (POSH)'s 1Q18 PATMI below but gross profits above expectations on strong contribution from Accommodation segment. 
  • OSV segment utilisation improves to 68% but still just below breakeven on a gross profit level. 
  • Malaysia Bulk Carriers Berhad (MBC) shareholders to vote on the proposed bulk share disposal at their EGM on 11 May. 

 Bulk share disposal remains an overhang 

  • Maintain HOLD on low earnings visibility for 2H18, and on technical overhang from MBC’s proposed bulk sale. 
  • We think the proposed bulk sale by major shareholder Malaysia Bulk Carriers Berhad (MBC) will remain a technical overhang on the stock in FY18. Meanwhile, although 1Q18 saw a strong contribution from the Accommodation segment, the two heavyweight 
  • Semisubmersible Accommodation Vessel (SSAV) assets have yet to secure charters for 2H18, which could lead to a feast (1H18) then famine (2H18) situation if jobs do not come in. Although POSH’s net gearing is now at c.1.6x owing to impairments taken, the company’s positive OCF, lack of bonds outstanding, and undrawn bank facilities of c.US$137m give us some comfort. 

Where we differ:

  • We believe MBC’s proposal to dispose of its 21.23% stake in POSH at a 15-30% discount to market price will be a technical overhang on the shares in the near term. 
  • Although MBC is affiliated to the Kuok Group, the chosen method of fundraising for MBC implies that the Kuok Group seems comfortable with a weaker share price for POSH. Of course, upside risk to our thesis could then be privatisation. 

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. 


  • We base our Target Price of S$0.32 on a P/BV peg of 1.0x on FY18 book value, which we believe factors in a gradually recovering offshore oil market offset by the disposal overhang. 

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 - 1Q18 PATMI below, but gross margins show sharp improvement

PATMI below on higher-than-expected operating expenses, but gross profit above as Accommodation segment did well.

  • POSH’s PATMI in 1Q18 was slightly below expectations mainly due to higher-than-expected admin and tax expenses. 1Q18 PATMI loss came in at US$7.2m whereas we were expecting about a US$4m loss. Gross profit was however, better than expected, at positive US$9.9m, a turnaround after six consecutive quarters of gross losses. 
  • The numbers surprised on the upside at the gross profit level mainly due to higher-than-anticipated profits from the Accommodation segment, as both SSAVs were working during the quarter and one newbuild MPSV vessel also contributed.

Segmental performance:

  • OSV segment revenues of US$21.7m and gross losses of US$0.3m were in line with expectations. Utilisation rate improved from 62% in 4Q17 to 68% this quarter, aided by a full-quarter contribution from the 12 vessels under long-term charters in the Middle East.
  • Accommodation segment revenues of US$38.9m and gross profits of US$9.3m were higher than expected, thanks to the deployment of newly delivered MPSV vessel (in November 2017) POSH Mallard and both the SSAVs being on contract during the quarter. Our concern is now on 2H18 profits, as both vessels have yet to secure jobs for that period, which could result in a feast (1H18) and famine (2H18) outcome this year if jobs do not come in for the two heavyweight assets.
  • Harbour Services and Transportation & Installation (T&I) segments were generally in line with our forecasts, though the T&I gross margin was slightly lower than expected as charter rates were depressed during the quarter. These two segments are relatively smaller contributors in revenue terms, though accounting for c.28% of FY18’s positive segment gross profits (i.e. excluding OSV segment losses), with the rest coming from the Accommodation segment.

Gearing remains elevated, but positive OCF is encouraging. 

  • OCF was positive this quarter at US$12.2m, while net gearing remained flat q-o-q at 1.63x.

Maintenance projects the bright spot; focus on Middle East and Africa.

  • POSH expects charter rates to remain under pressure due to continued oversupply of vessels, though the company is seeing an increase in enquiries for vessels supporting maintenance projects in 1Q18. Meanwhile, it is looking to continue to participate actively in tenders in the Middle East and Africa, which have relatively healthy activity levels.

Bulk share disposal by major shareholder Malaysian Bulk Carriers Berhad (MBC) announced in April. 

  • To recap, MBC announced that its wholly-owned subsidiary Lightwell Shipping Inc (LSI) is proposing to dispose of its entire 21.23% stake in POSH to all shareholders of MBC by way of a renounceable restricted offer for sale (ROS). The disposal is targeted to be completed by 2H18. MBC – with its 21.23% stake – is the second largest shareholder in POSH, after parent Kuok (Singapore) Limited, which holds 60.30%.
  • Due to the share price overhang expected from this sale, we downgraded POSH to HOLD in April with a Target Price of S$0.32 , as MBC was looking at a disposal price with a 15-30% discount to the then-prevailing market price, which implied a range of around S$0.2604-0.3162. That range has now been lowered to S$0.2225-0.2701, based on the circular to shareholders dated 26 April 2018, as POSH share price had declined between the date of the first announcement and the issuance of the circular. POSH is now trading around our Target Price and above the upper limit of that range. 
  • To be clear, the disposal price is only an indicative one at this point; the final price will be fixed at a later date. Nonetheless, we expect the sale to remain an overhang on POSH for the good part of 2018. 
  • Shareholders are due to vote on the proposed disposal at the MBC’s EGM on 11 May; the sale is targeted to be completed by August 2018.

POSH undertakes arbitration against Mexico relating to issues with Mexican vessels that arose back in 2014.

  • POSH has filed a Notice of Arbitration dated 4 May 2018 against the United Mexican States (Mexico) relating to actions taken by the country that POSH believes are in violation of the Bilateral Investment Treaty between Mexico and Singapore. We believe this relates to the vessels provided by POSH and its then-JV company Servicios Marítimos Gosh, S.A.P.I. de C.V. (GOSH) back in 2013/2014 to Oceanografía, S.A. de C.V (OSA) which then chartered those vessels to Pemex (national oil company). 
  • At the time, the Mexican government took over administration of OSA due to alleged fraud arising from billings charged by OSA to Pemex, which resulted in outstanding charter hire amounts due to POSH and GOSH. 
  • POSH made c.US$13.3m in allowances in 2013 and 2014 for these charters, by our calculations. Hence, winning this arbitration could bring in that amount of cash. 

Suvro Sarkar DBS Vickers | Glenn Ng DBS Vickers | 2018-05-09
SGX Stock Analyst Report HOLD Maintain HOLD 0.320 Same 0.320