■ No indication of operational turnaround from latest set of results
■ Capex remains substantial; company could be running low on capital
■ Downgrade to Sell (5); lower target price to SGD0.300
Pacific Radiance (PACRA) announced its 3Q15 results before market hours on 12 November. 3Q15 PATMI of USD1.7m was 87% lower YoY, even worse than the USD3.8m recorded in 2Q15. 9M15 PATMI of USD6.5m accounted for only 43% of our full-year forecast for 2015, the underperformance attributable to weaker-than-expected utilisation and day rates of its OSVs and subsea fleet. The company remains committed to its new-build plan to take delivery of 6-7 more vessels from now until 2016, incurring an additional USD150m in capex.
What's the impact:
Margins remain under pressure. Operating margins remain weak at 9% vs. 34% in 3Q14, with utilisation rates for its OSVs hovering at 64% for 3Q15 vs. 77% for 2Q15. Subsea utilisation improved from 3% last quarter to 32% currently. Without the USD6.6m in gains from the sale of 2 vessels this quarter, PACRA would have slipped into losses. According to data from Clarksons Research, day rates for OSVs continued to fall in the Jul-September period, with a YTD decline of about 34% for mid-size OSVs globally, indicating a challenging operating environment.
New-build plan to result in cash drain. As at end 3Q15, outstanding capex commitment stood at USD150m until end-2016, with USD120-130m funded by debt. Our concern remains the cash drain pertaining to the delivery of these new-build vessels that might not find employment amid an industry supply glut. The company is making a bet that the current O&G downturn is not a protracted one, a risky manoeuvre in our view, given that industry peers are aggressively warm/cold stacking their vessels.
Seeking approval for covenant relaxation. We previously highlighted in our oil services sector report (see “Not yet calling the bottom”, 21 September 2015) that PACRA’s interest coverage ratio of 2.2x based on 2015E EBIT and interest cost is a cause for concern. PACRA announced on 29 October that it is seeking to amend the covenant for its SGD100m 4.3% note due in 2018 which stipulate that EBITDA/interest expenses should not fall below 3.0x. The reported ratio currently stands at 4.1X, but this ratio could be as low as 2.0x if we assume no vessel gain with normalised EBITDA of USD7m a quarter (based on 3Q15).
EPS cuts. Given the poor operational performance this quarter, we cut our 2015-17E EPS by 28-50%. We expect this tough operating environment to persist for the next 12-18 months for OSV operators such as PACRA.
What we recommend:
Driven by our EPS cuts, we lower our target price to SGD0.300 (previouslySGD0.320), based on unchanged 8.9x multiple now applied to our 2016E EPS (previously: blended 2015-16E EPS). Given the recent share-price rally of 17% in the past 1 month, we are lowering our rating to Sell (5) from Hold (3).
Key risk: a strong upturn in the industry.
How we differ:
We are 40-47% below consensus on our 2015-17E EPS, due to our lower operating-margin assumptions. (Read Report)
Read Related Reports
1) Pacific Radiance - Vessel disposals save the day by CIMB Research, published on 13 November 2015
2) Idea Of The Day - Pacific Radiance by Lim & Tan Research, published on 13 November 2015
3) Pacific Radiance - Visibility still poor, better to avoid by Maybank Kim Eng Research, published on 13 November 2015
4) Pacific Radiance - Limited downside but weak outlook by KGI Fraser Research, published on 13 November 2015
Source : Daiwa Capital Markets