PACC Offshore Services Holdings - DBS Research 2018-08-08: Good News On The SSAV Front

PACC Offshore Services Holdings - DBS Group Research Research 2018-08-08: Good News On The Ssav Front PACC OFFSHORE SVCS HLDG LTD. SGX:U6C

PACC Offshore Services Holdings - Good News On The SSAV Front

  • POSH’s losses narrowed in 2Q18 as strong performance of Accommodation segment continues; visibility on SSAV (Semisubmersible Accommodation Vessel) contracts has improved significantly. 
  • OSV segment fleet utilisation improved to 76% in 2Q18 from 68% in 1Q18; but day rates still stuck. 
  • Entering offshore wind service vessels market with JV in Taiwan; long term upside potential. 
  • Near term share price performance clouded by overhang from proposed disposal of stake by Malaysia Bulk Carriers Berhad (MBC). 



Revenue visibility improves with SSAV contracts but maintain HOLD on 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, 2Q18 saw continued strong performance from the Accommodation segment, and the two heavyweight Semisubmersible Accommodation Vessel (SSAV) assets have seen charter extensions into 3Q18. The first SSAV has also secured a new 8+8-month contract with Petrobras in Brazil from end-2018, thus boosting revenue visibility. 
  • OSV segment utilisation continues to improve as well, but though overall gross profit margin for POSH improved to 17% in 2Q18, it is not enough to effect a turnaround at the net profit level yet. 
  • In terms of balance sheet, POSH’s net gearing is now at c.1.66x owing to impairments taken, but the company’s positive OCF, lack of bonds outstanding, lack of capex and undrawn bank facilities of c.US$119m give us comfort.



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Where we differ:

  • We believe Malaysia Bulk Carriers Berhad (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 sends mixed signals about POSH. 
  • Of course, once the MBC disposal exercise is completed, upside risk to our thesis could then be direct privatisation by Kuok Group as the only remaining majority shareholder. 


Potential catalyst:

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


Valuation: 

  • 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 either of the two SSAVs could result in downside risk to earnings. 


WHAT’S NEW - Accommodation segment drives improved operating performance in 2Q18


Good performance at revenue and gross profit level.

  • PACC Offshore Services Holdings (POSH)’s 2Q18 results were largely within expectations, though operating expenses were higher than expected owing to increased personnel and legal costs as well as higher allowance for doubtful debts. 2Q18 net loss came in at US$5.8m (lower compared to US$7.2m net loss in 1Q18 and US$9.1m net loss in 2Q17). 
  • Revenues and gross profit were higher than expected, as both SSAVs remained fully utilised on their respective charters in 2Q18. 2Q18 revenue of US$83.1m was up 96% y-o-y and 18% q-o-q, mainly due to the higher Accommodation Segment revenues. 
  • Gross profit improved to US$14.2m in 2Q18 from US$9.9m in 1Q18, representing a 3ppt gross margin improvement q-o-q to 17.1%.

Segmental performance:

  • OSV segment revenue came in at US$26.0m, up 20% q-o-q as full contribution of 12 vessels deployed under long term charters in the Middle East was complemented by utilisation improvement across the board. Overall OSV utilisation rate (including Middle East vessels) improved to 76% in 2Q18 from 62% in 4Q17 and 68% in 1Q18, demonstrating slowly improving fundamentals of the offshore vessel market.
  • Accommodation segment revenues of US$45.4m – up 17% q-o-q – and gross profits of US$11.6m – up 25% q-o-q – were higher than expected, as both the SSAVs remained fully employed during the quarter, and other accommodation vessels also recorded better utilisation and higher charter rates. More importantly, POSH announced that contracts for both SSAV vessels have been extended into 3Q18, against our earlier estimate of contracts ending in 2Q18, thereby reducing some uncertainty for the second half of the year. In more positive news, the first SSAV POSH Xanadu has secured a new contract with Petrobras and will commence her new charter in December 2018 for a firm period of 8 months, with an option to extend for a further 8 months.
  • Harbour Services and Transportation & Installation (T&I) segments were generally in line with our forecasts, and both segments recorded higher gross margins q-o-q in 2Q18.

Gearing remains elevated, interest costs go up.

  • OCF was negative this quarter owing to increase in receivables but 1H18 OCF remains positive overall at US$6.3m. 
  • Net gearing remained largely flat q-o-q at 1.66x, while interest costs edged up owing to rollover of unsecured borrowings.

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

  • Management notes that while market sentiment is more positive amid signs of increased investment and capex in offshore oil field development, charter rates may remain under pressure due to continued oversupply of vessels.
  • Meanwhile, they are looking to continue to participate actively in tenders in the Middle East and Africa, which have relatively healthy activity levels, and are looking to establish and expand offices in key markets to interface directly with customers better.
  • POSH is venturing into offshore renewables vessels market by establishing a JV in Taiwan with Kerry TJ, Taiwan’s largest logistics provider, to provide an integrated solutions platform for offshore wind farm developers, EPCI contractors and wind turbine manufacturers in Taiwan market. POSH will provide specialised offshore marine expertise and a modern fleet of vessels that are readily transferable to support offshore wind operations.
  • Management estimates there will be demand for installation of 600-800 offshore wind towers by 2025, as Taiwan is targeting 20-25% wind power in its energy mix by that timeframe and has already awarded wind projects of 5.5GW capacity. The bulk of the installation work will likely start from 2020 though, and will involve a mix of tugs & barges, OSVs, accommodation and crew transfer vessels. We believe this diversification move should improve prospects in the medium to long term.

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 December 2018. MBC – with its 21.23% stake – is the second largest shareholder in POSH, after parent Kuok (Singapore) Limited, which holds 60.30% in POSH.
  • Due to the share price overhang expected from this sale, we maintain our HOLD call on POSH with a Target Price of S$0.32. The offer price will be decided at a later date but will be at a 15- 30% discount to the prevailing market price.
  • Given that MBC minority shareholders who participate in the ROS will be free to dispose their shares in POSH to lock in immediate gains, that implies some possible selling pressure once the ROS is completed. Thus, we expect this process to remain an overhang on POSH share price for the good part of 2018.





Suvro Sarkar DBS Group Research Research | https://www.dbsvickers.com/ 2018-08-08
SGX Stock Analyst Report HOLD Maintain HOLD 0.320 Same 0.320



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