Pacific Radiance Ltd. - 2Q15 earnings recovery largely on depreciation policy change as subsea division sees near-zero utilization

2Q15 in the black largely on the back of depreciation policy change:
PACRA reported a 2Q15 net profit of US$3.8 million (excluding losses on vessels sales is ~US$4 mn), which is much higher than the US$0.9 million net profit seen in 1Q15. However, PACRA adjusted its depreciation policy (mainly for the larger new-build OSVs) extending depreciable life to 25 years (from 20 years), however this puts PACRA's depreciation policy largely in line with its peers. This provided a positive impact of US$3.5 million in 2Q15 (of which US$1.6 mn relates to 1Q15).

OSV utilization improves but subsea at near-zero utilization:
The OSV division’s utilization improved q-o-q from 50% in 1Q15 to 77% in 2Q15 along with Tugs & Barges at 64% in 2Q15 (versus 30% in 1Q15). However, subsea utilization was at only 3% (versus 22% in 1Q15) and Accommodation work barge also lower at 54% (versus 71% in 1Q15). As a result, we cut our FY15E /FY16E earnings by 50% / 25% on back of lower utilization and lower our Dec-16 PT to S$0.45 from S$0.55.
Consolidation opportunity on the look-out:
Management did highlight that the consolidation option (i.e potentially acquire OSV related companies) is on the table given the low price environment and assets at steep discount to book value. However, management did emphasize a wait & watch policy as it didn’t want to buy assets too early in this uncertain environment but preference would be for cash-generative assets.

Technical Analysis
Daily Chart
Gearing at 80% with yet-to-be funded capex of US$220 million:
With another 11 vessels to be delivered [5 in 2H15 and 6 in 2016 with 7 having been delivered in 1H15, 9 of which 2 x PSVs not on hire yet], gearing is likely to rise as new deliveries are taken. Management did highlight that of the remaining capex US$180 million from banks (already locked in), only US$40 million is needed from internal sources. (Read Report)

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Source : JP Morgan Asia Pacific Equity Research

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