Pacific Radiance -
Share Price S$0.915
Target Price S$1.19
A Virtuous-Cycle OSV Business
Pacific Radiance is principally an offshore support vessel (OSV) provider in the oilfield services industry. The group is managed by a team of industry veterans headed by Executive Chairman Pang Yoke Min, who is noted for co-founding Jaya Holdings and was its Managing Director from 1981 to 2006. Under Pang’s stewardship, Jaya Holdings grew to be Asia’s largest OSV builder in the last oil cycle.
• Target price of S$1.19 is pegged at 2015F PE of 9.5x, in line with the long-term (2004- current) 1-year forward PE mean of 9.5x for the OSV-owner segment. With the passing of 2013, we are rolling forward our 12-month target prices for oilfield-service stocks. Our PE valuations are now pegged at 2015 earnings as we expect 12-month target prices to price in 2015 earnings projections. Pacific Radiance offers: a) an experienced industry-veteran management, b) strategic market positioning, and c) strong earnings growth, a 3-year EPS CAGR of 31%.
• A virtuous-cycle OSV business
Pacific Radiance operates a virtuous-cycle business with:
a) a young, sought-after fleet;
b) vessels acquired at a cost that is lower than openmarket prices due to the group’s strong relationships with third-party OSV shipyards, while procurement of vessel equipment for new vessels is controlled tightly through direct purchases from suppliers; and
c) strategic positioning in high-growth subsea services and high-barriers-to-entry cabotage oil & gas (O&G) markets such as Indonesia, Malaysia and South America.
Indonesia is expected to see the biggest increase (+172%) in O&G spending in Asia in 2013-17 while Malaysia is the largest spender with US$24b. Separately, spending on subsea services is forecast to increase by 335% in 2013-17.
• Timely fleet expansion, while strategically positioned for growth
19 new vessels will be added over 2014-15. These are part of an ongoing US$390m capex programme (including US$70m for a shiprepair yard). This will expand fleet size from 59 vessels to 78, although selected vessels may be sold to high-growth JVs and associates in Indonesia and Malaysia. Our earnings forecasts have not factored in the next capex programme, estimated at US$350m. We estimate additional earnings of US$19m, possibly from 2H15 onwards. Against our 2015 net profit, this would be an enhancement of 26%.
• Fleet renewal and management strategy sustains gains from vessel disposals
The group has a large fleet and a market-savvy fleet renewal strategy that adds and prunes vessels vis-a-vis strong vessel demand from its tie-ups in Indonesia and Malaysia as well as third parties. This structure provides opportunities to make gains from vessel disposals. We expect gains of US$17m p.a. in 2014-15.
• Potential downside risks are:
a) A sharply lower oil price,
b) an inability to secure funding for new capex would curb growth beyond 2015, and
c) vessel charter rates are sensitive to regional/global OSV fleet supply-demand balance.