• Still seeing positive OCF
• Middle East a bright spot
• Upgrade to HOLD

Strong Financial Position an Imperative

It has been a tough time for offshore and marine companies since the oil price crash in 3Q14. More than two years into the storm, companies with weak balance sheets and little operating cashflows are struggling, with some having thrown in the towel. Among the stocks under our coverage, PACC Offshore Services Holdings (POSH) is still in relatively better position, with positive operating cashflows of US$38.2m in FY16 and US$69.6m in FY15.

Net gearing was 1.0x in FY16 due to non-cash impairments which reduced equity, but the group has been enjoying good relations with its banks. As at 31 Dec 2016, it had undrawn bank lines of about US$282.9m. Besides keeping a strong balance sheet to stay afloat during these uncertain times, it is also important to do so as oil majors are likely to disqualify bidders with weak financials.

Middle East Still Holding Up

Looking ahead, POSH has 14 vessels under construction or on order with expected delivery progressively by 2017, of which 10 are for the Middle East with firm five years plus two years extension contract. For these 14 vessels, US$113.1m have been paid as at 31 Dec 2016, leaving about US$85.6m outstanding.

The group has been able to secure contracts for its vessels from the Middle East, which is a positive given that the region is still seeing good activity. However, this also means that the area is seeing a growing supply of OSVs with the arrival of new tonnage from other regions; it is important that the supply growth does not outstrip the demand for OSVs.

Upgrade to HOLD

We roll forward our valuations to blended FY17/18F NTA while keeping our multiple unchanged at 0.7x, such that our fair value estimate rises slightly from S$0.33 to S$0.335. Since our last report on 22 Feb 2017 in which we downgraded the stock of POSH to Sell, the stock price has declined about 7% and is now closer to our fair value estimate. As such, we upgrade our rating to HOLD.

Source: OCBC Research - 12 Apr 2017