Pacific Radiance - Fancy a free boat?


PACRA’s share price recently hit an all-time low and we estimate that it is trading at a 17% discount to its liquidation value of S$0.62/share. As there has been no further deterioration in market conditions and we deem that the OSV market is at a trough, we are now more convinced than ever. We still cut FY15-17 EPS by 2-7% as we fine-tune our earnings model and cut FY15-17 DPS by 20-200% as PACRA could preserve cash during this downcycle. Previous estimates were for 3 Scts DPS p.a. based on FY14 absolute payout. That said, the stock still offers c.4-5% forward dividend yields. Our 7.5x CY16-based target price (1s.d. below small/mid-cap 5-year mean) is trimmed to S$0.85. We recommend investors to be positioned in the stock in a big way with catalysts from a stronger 2H. Maintain Add.

What Happened
Recent share price weakness has lowered PACRA’s valuation to compelling levels, increasing our conviction in our Add call even as we cut our FY15-17 EPS and target price.

What We Think
Our high-conviction rating is premised on the fact that PACRA is one of the few SGX-listed OSV stocks trading below its estimated liquidation value* or RNAV, despite the sector-wide tumble in share prices. This is because the share prices of many O&M stocks were previously above RNAV while the vessels’ market value has also fallen, in tandem with the oil price rout. More importantly, we like PACRA’s fleet of vessels as it is young, mainly shallow-water and diversified. Hence, it is relatively more realisable vs. fleets which are more bespoke and have sophisticated tonnage. Shallow-water fleets are arguably a safer harbour in a market downcycle.

Plus, we note that the OSV secondary market remains liquid and that the market values of secondary OSVs do not swing as wildly as commercial shipping’s. The pushback from investors on PACRA is that OSVs are deemed to be commoditised and over-supplied, and hence, not a good offshore asset-class to own. While we broadly agree, we think that investors are missing the point that the OSV market is now at a trough and we do not see it deteriorating significantly. For example, the global OSV order book-to-fleet is 18% while global jack-up rig order book-to-fleet is 25% and drillship order book-to-fleet is 40%. This implies that the worst is yet to come for drilling assets as further supply is expected to flood the market.


Technical Analysis
Daily Chart
What You Should Do
PACRA is our top pick in the small/mid-cap O&M sector. While 2Q is anticipated to remain weak, we are equally aware that it is difficult to catch a stock at its trough. We deem that a c.20% discount to its liquidation value is a compelling reason. (Read Report)

Source : CIMB Research

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