PACC Offshore Services Holdings - DBS Research 2019-02-26: Positive Operating Cash Flows The Main Silver Lining

PACC OFFSHORE SVCS HLDG LTD. (SGX:U6C) | SGinvestors.io PACC OFFSHORE SVCS HLDG LTD. (SGX:U6C)

PACC Offshore Services Holdings - Positive Operating Cash Flows The Main Silver Lining

  • POSH’s 4Q18 core net loss of US$30.5m wider than expectations owing to high operating expenses. 
  • OSV segment remains weak, but utilisation should pick up in FY19 with higher offshore capex trends. 
  • Cash flows remained positive in FY18 even as net gearing rose to 2.1x on further asset impairments taken. 
  • Maintain HOLD with lower Target Price of S$0.20. 



Still incurring losses.

  • As expected, PACC OFFSHORE SERVICES HOLDING LTD. (SGX:U6C, POSH) took another round of asset impairments in 4Q18, primarily related to its OSV fleet, but core operating performance was also weaker than expected, with OSV segment recording gross losses of US$9m, as fleet utilisation deteriorated q-o-q and drydocking/ maintenance costs picked up.
  • Looking forward, we expect OSV segment’s utilisation to stabilise on the back of improving offshore capex trends. But Accommodation segment’s performance could be more subdued in FY19, as the Group has yet to find employment for the second Semisubmersible Accommodation Vessel (SSAV) though the first SSAV will be on contract in Brazil for most of the year.
  • P&L losses can be expected to continue in FY19/20 as day rates are unlikely to pick up significantly, but POSH is expected to maintain its positive operating cash flows and survive the downturn.


Where We Differ:

  • POSH’s earnings are highly leveraged to the utilisation of the SSAV assets. However, we believe share price will only rerate meaningfully when the OSV division comes back to life with an improvement in day rates driving margins in addition to the ongoing improvement in utilisation rates.


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. Potential of privatisation by parent Kuok Group exists as well.


Valuation:

  • We cut our Target Price to S$0.20 (0.8x P/BV) as we lower our FY19F earnings to factor in slower recovery in OSV segment.


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 - Headline numbers reflect another round of impairments


Lingering OSV overcapacity stifles recovery.

  • 4Q18 reported net loss of US$80.0m, driven by impairments of US$49.5m primarily related to OSV vessel fleet, and around US$6.0m of impairments from associates/JVs. Core operating margins narrowed as well, plagued by lower fleet utilisation and higher operating costs during the quarter.
  • Barring asset impairments, POSH would have recorded core net loss of US$30.5m in 4Q18, compared to US$29.5m core net loss in 4Q17 and US$5.3m core net loss in 3Q18.

Segmental performance:

  • OSV segment revenue came in at US$19.7m, up 16% y-o-y due to full contribution of 12 vessels deployed under long term charters in the Middle East in the period (against 6 vessels in 4Q17), but was down 19% q-o-q owing to subdued day rates and lower utilisation. Overall OSV utilisation rate (including Middle East vessels) deteriorated to 68% in 4Q18 from 75% in 3Q18. A sequential decline in revenue, increased operating costs in OSVs (deployed out of the Middle East), and dry docking/maintenance costs of around US$3.0m led the segment to fall deeper in the red, with segmental gross losses widening to US$9.0m in 4Q18 (compared to gross losses of US$1.0m in 3Q18 and US$6.1m in 4Q17).
  • Looking ahead, we are optimistic on an upturn in utilisation of OSVs in 2019, given increased offshore capital spending, particularly the exploratory front, but expect the supply overhang to cap any meaningful improvement in day rates.
  • Accommodation segment revenues came in at US$36.4m (+1.5% y-o-y, -21.2% q-o-q), as utilisation of both SSAV vessels dropped to 53% in 4Q18 from full utilisation in 3Q18. The decline was mitigated by higher utilisation (around 85%) and an uptick in the charter rates of other shallow water accommodation vessels in the quarter. Higher maintenance and dry docking costs, as well as mobilisation costs for the two SSAVs saw gross margins contracting to 9.8% in 4Q18 (against 30.3% in 3Q18 and 14.4% in 4Q17).
  • The first SSAV POSH Xanadu commenced her new charter with Petrobras in Jan-19, for a firm period of 8 months, with an option to extend for a further 8 months. However, POSH has yet to secure a contract for the second SSAV POSH Arcadia, and remains hopeful on sourcing prospective charters in 2019. Hence, we expect revenue in 1Q19 to decrease sequentially as utilisation of the SSAVs in the quarter is unlikely to exceed 50%.

Operating cash flow remains sound, gearing should stabilise.

  • POSH posted positive operating cash flows of US$7.5m in 4Q18, with full-year operating cash flows climbing to US$27.5m from US$20.3m in FY17. Net gearing escalated q-o-q to 2.07x on the back of asset impairments, while interest costs edged up due to higher debt and interest rates.
  • With impairments out of the way, we expect gearing to remain fairly stable. POSH is pivoting towards an asset-light strategy, with more asset reprofiling towards new or growth areas, which should ensure minimal capital investments in the foreseeable future.

Maintenance projects the bright spot; geographic focus now includes more countries in Asia.

  • Management believes the offshore maintenance segment should pick up, underpinned by increased activity in mature field. Currently, POSH is participating actively in tenders in the space, including subsea IRM work, with two contracts clinched since forming the subsea team in end 2018. The company also intends to expand their services portfolio, and aims to be a one-stop renewable and subsea service provider to reduce their concentration to subdued OSV day rates.
  • In addition to Middle East and Africa, POSH is also targeting new regions in Asia to capitalise on activity in the region. In this regard, POSH has opened multiple new offices in countries like Taiwan, India and Brunei, to gain proximity to customers.

POSH JV targeting contracts in offshore renewables vessels market.

  • To recap, POSH established a JV called POSH Kerry in Taiwan in partnership 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 reiterated their stance and the favourable prospects in this space, and foresees elevated demand in 2020 and beyond. While contribution in the near-term may be limited, we believe this diversification move should improve prospects in the medium to long term.

Near term earnings may not make for good reading, maintain HOLD.

  • Earnings in FY19 will remain subdued as both SSAVs are unlikely to be employed concurrently for the full year.
  • OSV segment performance should hopefully improve with more oil majors restarting projects as offshore capex trends pick up. But with no respite from losses, we maintain our HOLD call on the stock with a lower Target Price of S$0.20 (0.8x FY19 P/BV).





Suvro Sarkar DBS Group Research | https://www.dbsvickers.com/ 2019-02-26
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.20 DOWN 0.250



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