PACC Offshore Services Holdings - DBS Research 2019-05-13: Gross Profit Back In The Black, But Continued Losses At Bottomline

PACC OFFSHORE SVCS HLDG LTD. (SGX:U6C)

PACC Offshore Services Holdings - Gross Profit Back In The Black, But Continued Losses At Bottomline

POSH's 1Q19 net loss of US$12.7m slightly worse than expectations on the back of higher operating expenses.
OSV fleet utilisation trends encouraging.
Operating cash flows remained positive in 1Q19.
Maintain HOLD with Target Price of S$0.20.

PACC OFFSHORE SERVICES HOLDINGS (POSH, SGX:U6C)’s net loss of US$12.7m in 1Q19 (vs US$7.2m loss in 1Q18) was slightly worse than our expectations, due to higher SG&A and finance costs, and lower than expected contribution from JVs.
1Q19 gross profit of US$6.8m (vs. US$4.8m gross loss in 4Q18) exceeded our expectations though, due to higher than anticipated overall vessel utilisation across segments, but subdued day rates remained a significant drag on operating margins, especially in the OSV segment.
In addition, a drag from US$1.6m loss in POSH’s JV POSH Terasea – owing to lower workload – contributed to underperformance at the bottomline.

OSV segment’s revenue in 1Q19 was higher at US$24.3m (+12% y-o-y, +23% q-o-q), benefitting from higher vessel utilisation of 70% in 1Q19 (vs 68% in 1Q18 and 4Q18). Though there was an improvement in vessel utilisation, gross losses in the segment was flat y-o-y at US$0.3m, as the segment continues to be plagued by depressed day rates. As a rebound in day rates is not quite imminent, gross profits in the segment will likely continue to be under pressure, despite an anticipated improvement in vessel utilisation.
We believe the global glut of OSVs will ease slowly over time, as offshore capex trends pick up, but unlikely to cause significant spurt in OSV day rates in the FY19/20 timeframe.

OA segment revenue came in at US$23.8m (-39% y-o-y, -35% q-o-q) in 1Q19, primarily due to POSH Arcadia – one of POSH’s two semisub accommodation vessels (SSAVs) – being unemployed during the quarter. Similar to the previous quarter, the decline was tempered by the full utilisation of all monohull vessels in the OA fleet. Segment gross profits thus moderated to US$5.0m (-47% y-o-y).
Looking ahead, we anticipate gross profit contribution from this segment to be sustained near the current level for the next two quarters. As a recap, the first SSAV POSH Xanadu commenced her charter with Petrobras in Jan-19, and is expected to remain contracted till the end of 3Q19. However, POSH has yet to clinch a contract for the second SSAV, POSH Arcadia. And given the lengthy bidding and mobilisation process, we believe contribution from POSH Arcadia will likely come in during mid to late 3Q19 at the earliest.

Contrary to the OSV and OA segments, the T&I and HSER segments achieved growth in gross profits. The T&I segment booked revenue of US$7.5m (+49% y-o-y) and gross profit of US$1.0m (+125% y-o-y), owing to higher vessel utilisation of 58% in 1Q19 (vs 53% in 1Q18).
Likewise, the HSER segment achieved revenue of US$6.2m (+26% y-o-y) and gross profits of US$1.1m (+164% y-o-y), due to a higher amount of overseas charters. With greater subsea tendering activity in the region, further traction in POSH’s subsea operations could catalyse a turnaround in the T&I segment.

Like previous quarters, POSH maintained positive operating cash flow in 1Q19 amid the challenging operating environment.
POSH booked an operating cash flow of US$5.7m in 1Q19. Net gearing inched up slightly to 2.2x in 1Q19 from 2.1x a year ago, while finance costs edged up due to higher interest rates.

During the quarter, POSH’s newly established subsea segment clinched its second contract to support a pipeline replacement project off the coast of India.
Meanwhile, its new renewable energy JV - POSH Kerry - has also won several contracts to support offshore survey and preparatory works for windfarm construction in Taiwan.
Contribution from windfarm construction related contracts however, may be limited in the near-term, as bulk of the construction work is slated to begin in 2020 and beyond.

Captain Gerald Seow retired as CEO of POSH on 1 May 2019, but continues to serve as a Non-Executive Director of POSH. Mr. Lee Keng Lin, who was the Deputy CEO of the Group, has succeeded Captain Seow as CEO.
We believe this implies business as usual for POSH as Mr. Lee has been with the Group since 2007 and has been instrumental in the development and execution of several new business initiatives, and thus has in depth knowledge and experience in the space.

We believe earnings in FY19 will remain subdued as both SSAVs are unlikely to be employed concurrently for the full year.
OSV segment performance has shown signs of improvement and should hopefully improve further with more oil majors restarting projects as offshore capex trends pick up. While that may not be enough to swing POSH away from losses at the bottomline, we believe downside risks are limited, especially with sentiment for oil services companies improving in recent months on the back of expectations of offshore capex recovery.
Hence, we maintain our HOLD call on the stock with a Target Price of S$0.20 (0.8x FY19 P/BV).

Suvro Sarkar DBS Group Research | Singapore Research Team DBS Research | https://www.dbsvickers.com/ 2019-05-13

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.200 SAME 0.200