Pacific Radiance - Turnaround takes time
- OPEC cut brightens oil outlook.
- Higher oil prices and rig counts bode well for increase in OSV demand.
- Upgrade to HOLD with higher TP of S$0.16.
Upgrade to HOLD with higher TP of S$0.16, based on 0.25x P/BV (0.20x previously).
- Oil prospects have been lifted with the OPEC deal. We believe OSV operators like Pacific Radiance will be more leveraged to the oil price increase and an eventual restoration of capex budgets from oil majors. PACRA will still need to resolve cash flow problems but at least further earnings downside risks should abate with improvement in oil prices.
- Hence, we upgrade the stock to HOLD.
Addressing cash flow constraints.
- Operating cash flows have been negative for four consecutive quarters now; hence the gross cash balance remains low at c.US$30m.
- The looming maturity of PACRA’s August 2018 S$100m notes remains a medium-term risk. A refund from the Chinese yards of c.US$11m expected in 4Q16 on deposits for terminated PSV contracts could help boost the cash balance temporarily, but does not address PACRA’s core issues.
- On the positive side, the company has managed to push out the repayment and maturity profiles of its loans (from a 7- to 12-year profile and 2019-2021 maturity on average) at minimal extra cost.
Expect losses to persist in FY17; further earnings downside risks abate with improvement in oil prices.
- We expect core net losses in FY16/17 of US$54m/US$58m respectively. FY17 revenues are expected to be lower y-o-y on poorer OSV segment takings.
- Hopefully, with the improving oil prospects and rising rig count, demand for OSVs should start going up in a bigger way towards 2H17, earlier than previous expectation of 2018.
- TP is lifted to S$0.16 based on a higher P/BV peg of 0.25 (0.2x previously) – in line with the weaker peers in the region and reflecting a slight uptick in valuations in anticipation of sector recovery.
Key Risks to Our View
- A sharp spike in oil price – albeit unlikely in our view – could result in uplift in utilisation and day rates for vessels, boosting earnings and the share price.