Swissco Holdings - 3Q15: OSV losses and GOM headache

■ 3Q15 core net profit of US$6.1m (-22% yoy/-59% qoq) was below our expectations.

■ Dragged by OSVs, the group incurred losses at EBIT level.

■ Two of its nine rigs are currently off-hire. We expect another rig to be idle at end-Nov when its contract ends.

■ Our base case assumes downtime for four rigs in FY16, implying that the group would still be able to deliver 11% ROE in FY16 and meet its COE.

Maintain Add. At 0.5x CY16 P/BV, we think that the market is pricing in a very bearish scenario.

3Q15: losses from OSVs and Gulf of Mexico (GOM) headache
Dragged by the losses from OSVs and two jack-up rigs going off-hire in 3Q15 (both deployed in the Gulf of Mexico), 3Q15 core net profit fell 22% yoy and 59% qoq to US$6.1m. 9M15 core net profit formed 77% of our full-year forecast (3Q formed 13%), which we deem below expectations. We expect earnings to deteriorate in coming quarters as more rigs go off-hire. Incorporating the weaker 3Q results, we cut FY15 core EPS by 10% and slash FY16-17 EPS by 27-35%, mainly for weaker OSV margins.

We estimate that OSVs incurred losses at EBITDA level
Revenue fell 43% yoy to US$10.4m in 3Q15, mainly due to a sharp drop in offshore support vessel (OSV) turnover, while one of the two wholly-owned jack-up rigs went offhire at end-Jun. OSV revenue tumbled yoy to US$5.2m in 3Q15 (3Q14: US$28.2m), while drilling revenue was halved qoq to US$5.2m (2Q15: US$10.7m). The group generated US$4.5m EBITDA and our back-of-envelope calculations indicate that OSVs incurred c.US$5m EBITDA loss.

Two of nine rigs are currently off-hire, expect another to be idle at end-Nov when its contract ends
Share of profits of associates & JVs decreased 14% qoq but rose 1.7x yoy to US$10.7m in 3Q15. The qoq drop was due to one of the jointly-owned rigs going off-hire at endSep. Another rig contract is expected to end at end-Nov. Management shared that it is tendering for jobs in the Middle East for the idle rigs, the results of which will be known by end-2015. The yoy increase was due to four additional rigs being acquired on jointlyowned basis. Headline net gearing improved to 0.65x at end-3Q15 (end-FY14: 0.8x).

Pemex woes
Following the US$10bn net loss in 3Q15 (the 12th consecutive quarter of net loss), Pemex (Mexico’s national oil company) has been scaling back its rig fleet and renegotiating daily rental rates. Mexican drillers Grupo-R and Oro Negro were the latest to feel the pinch and they have pushed back their newbuild deliveries from Keppel and SMM, respectively.

Technical Analysis
Daily Chart
Valuation call; maintain Add
At 0.5x CY16 P/BV, we think the market has priced in losses for FY16 and the expectation that all nine rig contracts will be canceled, which we deem too pessimistic. Our base case assumes downtime for four of its nine rigs, implying that the group would still be able to deliver 11% ROE in FY16 and meet its COE. Maintain Add with an unchanged target price, now based on 1x CY16 P/BV as we roll over to end-2016. (Read Report)

Source : CIMB Research

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