Saturday, February 1, 2014

Pacific Radiance: Radiating Promising Earnings Growth With Aggressive Fleet Expansion

17 JANUARY 2014
Pacific Radiance: Radiating Promising Earnings Growth With Aggressive Fleet Expansion
By Nicholas Tan

Fresh from its initial public offering (IPO) listing on the mainboard of the Singapore Exchange in November last year, Shares Investment was privileged to have caught up with Pacific Radiance’s managing director, commercial and business development, James Pang, in an exclusive interview to share with us the company’s latest developments, competitive edge and future growth plans.

As we began a new year, you would recall that the local stock market failed to hold on to its May 2013 gains and ended last year flat. One industry, however, stood out from the others and is expected to continue to outperform this year, as the prevalent hunt for black gold intensifies in high growth regions such as Asia. Global spending by governments and international oil majors on offshore exploration and production have been on the rise, in anticipation, that the demand for energy will surge along as the pace of the world’s economic recovery hastens.

Supported by a robust track record and an experienced management team, Pacific Radiance, a Singapore-based provider of integrated offshore marine services, decided to capitalise on the upbeat sentiments surrounding the oil and gas sector, by tapping on the local equity capital market to raise funds for its fleet expansion plan. This is part of a strategic goal for the company to build a sizeable fleet in each region in order to meet operational efficiency. In its IPO listing, the group raised net proceeds of $150.6 million, of which about 92.9 percent is set aside for fleet expansion.

Green Technology Vessels
Pacific Radiance currently owns and manages a relatively young and diverse fleet of 62 offshore vessels comprising a spectrum of vessels such asanchor handling tug and supply vessels, platform supply vessels, dive support vessels and accommodation barges, with an average age of 3.3 years old, which are being chartered to customers in regions such as Asia, South America, Africa and Australia.

The importance of a young and diverse fleet is not to be undermined as Pang explained, “These days oil and gas companies not only have a preference to work with offshore marine service providers with a young fleet, as this translates into lesser downtime for them, but they also require diversity, in terms of vessel types to cater to all their offshore oil exploration needs across the oil and gas life cycle.”

The group constantly engages its customer base to calibrate the specific type of vessels, to meet the demand in the market, and boosts a clientele of well-known players in the oil and gas industry such as international oil and gas contractors such as Subsea 7, McDermott and Saipem, as well as international oil companies such as Shell, Total and Chevron, among many others.

As part of its newbuild programme, the group is currently building 19 new vessels including a variety of offshore support vessels (OSV) and deep sea support vessels at third-party shipyards in China. The vessels will be delivered within the next two years. Beyond that, the company is pressing ahead with its advantage and is expected to build between six to eight new vessels per year, which are customised to suit specifications required in different regional markets.

In an industry where the vessel charterer pays for the fuel consumption, cost is an important factor to consider. Pang said, “These new vessels will be designed to operate in deeper waters and under hasher conditions yet run on the latest green technology, hence they consume less fuel and have less carbon emission, thus enabling the charterers to save up to 23 percent in fuel consumption.”

Asia’s Emerging Frontier
Apart from its own fleet, the group also has access to another fleet of more than 70 offshore vessels, which are jointly-owned with associate companies. Pacific Radiance’s business model of forming strategic partnerships with firms in local markets allow it operate in key countries with cabotage laws such as Malaysia and Indonesia, thus penetrating these targeted high exploration and production spending markets, and capture growth opportunities.

The group’s associate company in Indonesia, PT Logindo, recently also listed on the Indonesia Stock Exchange on 11 December 2013.
The offshore vessel owner and operator, which plays a vital role in the group’s plans to grow in Indonesia’s cabotage-protected market, raised approximately US$32.4 million in gross proceeds through the listing, most of which will be used to expand its local fleet.

“Indonesia is the fastest oil exploration and production spender in the whole of Asia, and growth is expected to triple in the next five years. To meet the high energy demand, Logindo has reached a stage whereby it needs to tap the equity capital market so that it has funds to acquire more vessels,” Pang explained when asked about the reasons behind Logindo’s listing.

Pang added that Indonesia with a population of 250 million and a growing middle-income class is likely to be at the forefront of oil and gas demand for this region. “At this point of time, Indonesia is producing only 800,000 to 900,000 barrels of oil per day (bopd). To meet the local demand, the country would have to produce 1.4 million bopd. Hence, demand and supply dynamics point to a shortfall, leading to a strong impetus for them to continue to explore and produce more oil and gas in the near future.”

Overall, Pang is optimistic on the growth in Asia’s energy demand and expects this region to see robust opportunities with sustainable long-term growth as it is underpinned by an enlarging population demographic and an increasing wealth effect.

Upside Potential
Pacific Radiance operates in three key business segments, among which are the offshore support services, subsea business and complementary businesses such as project logistics and marine equipment. Each of these segments contributes 67.1 percent, 25.6 percent and 7.3 percent respectively to topline, based on 1H13 financials segmental breakdown

While the bulk of its revenue is still derived from Asia, the group has managed to penetrate beyond the region in recent years, thanks to its concerted efforts to venture into high growth overseas markets such as Africa, Latin America and Australia. As such, revenue contribution from Asia has dipped to 58.6 percent in 1H13 from 72.9 percent and 85.6 percent in FY12 and FY11 respectively. For the past three years, the firm reported exceptional revenue and net profit cumulative aggregate growth rate of 47.9 percent and 47.5 percent respectively.

In a research note released on the 8 January 2014, UOB KayHian initiated coverage on Pacific Radiance with a 12-month target price of $1.19 based on 9.5 times price-to-earnings ratio (PER) on FY15 forecast earnings. The valuation is rolled forward to peg at 2015 earnings with the passing of 2013, as the research house expects 12-month target price to include 2015 earnings projections. The target PER multiple is in line with 9.5 times 1-year forward PER mean of the OSV-owner segment of the offshore and marine sector.

The research house further cited that if earnings come in above expectations over a period of time, the stock may command a premium over the segment’s PER mean valuation, reflecting its experienced management team, strategic positioning in high-growth markets such as Indonesia, Malaysia and South America, and subsea services, as well as earnings upswing with the impact of 19 new vessel deliveries over 2014 to 2015.

In 2014, nearly all the local oil and gas-listed players, large and small, have announced a slew of contracts. Analysts believe that the industry will continue to be a favourable one this year, given strong order books and good long-term earnings visibility. Apart from these factors, Pacific Radiance’s proven and well-tested execution strategies could be just the “radiating” factor needed to make it stand out among other oil and gas plays, as the stock recently hit its all-time closing high of $0.995 on 9 January 2014.

Publish date: 17/01/14

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