PACC OFFSHORE SVCS HLDG LTD. (SGX:U6C)
PACC Offshore Services Holdings - Privatisation Offer Announced By Parent
- Kuok Group entity makes cash offer for PACC Offshore Services (POSH) at S$0.215 per share, a significant premium to recent trading range.
- Offer valuation is not unreasonable at 1.0x P/BV, but minority shareholders may wait for a better offer, as industry downcycle may be past the worst.
- 3Q19 results point to better than expected operating performance across key segments.
What’s New
Kuok Group (or the offeror) has announced a voluntary conditional cash offer of S$0.215/share for all issued and outstanding shares of PACC OFFSHORE SERVICES (POSH, SGX:U6C).
- The bid vehicle is Quetzal Capital Pte. Ltd., the shareholders of which are Kuok (Singapore) Limited (KSL), Trendfield Inc., a wholly-owned subsidiary of Kuok Brothers Sdn Bhd (KBSB), and Merry Voyage Limited, a wholly-owned subsidiary of Kerry Holdings Limited (KHL). KSL, KBSB and KHL are all members of the Kuok group of companies (the Kuok Group). See PACC Offshore Announcements; PACC Offshore Latest News.
- KSL currently has an interest in 75.03% of issued shares of PACC Offshore Services (POSH). It has given an irrevocable undertaking to accept the offer and tender all its shares to the offeror.
- The offer price is final and is conditional upon the offeror holding 90% or more at the close of the offer (acceptance condition) The offeror and related parties currently own approximately 75.03% of the issued shares in PACC Offshore Services, and will thus need to get valid acceptance of another 15% (~60% of minority shareholders) to cross the 90% threshold. Once valid acceptances cross 90%, the offeror will be entitled to exercise its right to compulsorily acquire, at the offer price, all shares held by shareholders who have not accepted the offer. Subsequently, the offeror intends to delist PACC Offshore Services should the exercise be successful.
Offer price is at significant premium to recent trading range.
- The offer price represents a premium of 97% over the last traded price of S$0.109 on the last full trading day before the announcement (30 Oct 2019), and a premium of 69% over the price of S$0.127 before trading was halted on 31 Oct 2019.
- Compared to 1-month, 3-month, 6-month and 12-month Volume Weighted Average Prices (VWAPs), the premium implied by the offer price is 110%, 96%, 70% and 35% respectively. Thus, the offer price premium is at the higher range of privatisation premiums seen on the SGX in the recent past.
Rationale for the offer.
- The offeror believes the offer represents an attractive exit point for minority shareholders owing to the premium offered and lack of liquidity otherwise.
Concurrently, PACC Offshore Services also released 3Q19 results, which was considerably better than our expectations.
- 3Q19 gross profits came in at US$16.1m (+18% y-o-y, +92% q-o-q), markedly better than expectations, driven by a surprise uplift in the gross margins in the offshore support vessel (OSV) and offshore accommodation segments (OA). This was the highest gross profit level and gross margin recorded since 4Q15. See PACC Offshore Announcements.
- Barring a US$39.2m impairment associated with the winding up of its JV, POSH Terasea, core net loss of US$1.2m exceeded our expectations comfortably as well.
- While it is too early to expect a return to profitability anytime soon, PACC Offshore Services’s impressive 3Q19 performance holds some ray of hope, especially with the US$130m worth of new contracts secured during the quarter.
Our thoughts
Offer price is not unreasonable under current circumstances, in our view.
- At the offer price of S$0.215 and issues shares of 1814m shares, the implied valuation of PACC Offshore Services is S$390m or around US$287m. This represents exactly 1.0x P/B based on the balance sheet as at end-3Q19. This price-to-book multiple is at +2sd of the five-year average, and above the peer average of 0.4x, and the implied EV-to-EBITDA (FY20) multiple of 13.9x is also above the peer average of 7.7x (see peer comps on the following pages).
- If we were to assume a further impairment of around US$40m to its existing fleet, the offer price would imply an even higher 1.15x P/B. Given the continuing loss-making nature of the business overall in the near term and chances of turnaround unlikely in 2020 as well, we believe the at-or-above-book pricing is not unreasonable, even after factoring in a premium for full ownership.
However, pricing will only appear attractive for recent shareholders.
- Note that the IPO price back in 2014 was S$1.15, a far cry compared to the offer price being paid now to privatise PACC Offshore Services. Long term shareholders may feel somewhat aggrieved.
- The bulk share sale in PACC Offshore Services by Kuok affiliate Malaysian Bulk Carriers (MBC) in October 2018 to its own shareholders was also completed at a price of around 65sen or around S$0.22; hence MBC’s minority shareholders owning PACC Offshore Services shares are also not seeing any return on investment in this offer. The only mitigating factor is that any sustained share price recovery based on fundamentals is likely 1-2 years away at least and probably, even further out in the horizon.
- Oversupply and intense competition in the offshore support vessels sector is expected to persist for a while and visibility on sustained day rate recovery is limited at this point of time.
Given that 3Q19 results were better than expected, some hope may filter through.
- We are starting to see some initial positive signs in the sector and believe the carnage in the OSV sector is well past us at least, so downside is limited, even though upside is tough to call. The global utilisation of OSVs (PSV and AHTS vessels) has risen to around 66% as at Oct-19 from 57% in Jan-19, and day rates in certain parts of the world like the North Sea and the Middle East have rebounded from their lows, underpinned by an improvement in utilisation rates. Recovery is not that prominent in PACC Offshore Services’s home market of South East Asia yet.
- Meanwhile, PACC Offshore Services is actively diversifying beyond traditional OSV services to growth areas like the subsea services and offshore renewables support vessels space, and this diversification story could unfold over time.
Hold on for better pricing?
- Though we feel offer price is not unreasonable, minority shareholders may consider holding out for more, given that the Kuok Group is trying to privatise at close to the bottom of the cycle, when share price was almost at lowest ever levels for PACC Offshore Services, and faint positive signs may be emerging operations wise.
- Though offeror has said that offer price is final and will not be revised, we believe there could be a rethink if acceptance level is below 90% eventually. Thus, we maintain HOLD for now, with Target Price revised to S$0.22 (1x FY19 P/BV), in line with the offer price, pending further developments. See PACC Offshore Share Price; PACC Offshore Target Price.
Suvro Sarkar
DBS Group Research
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Jason SUM
DBS Research
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https://www.dbsvickers.com/
2019-11-06
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