PACC Offshore Services correction presents buying opportunities

2Q14 results below expectations
PACC Offshore Services Holdings Ltd. (POSH) reported 2Q14 results which fell short of our expectations. Revenue declined 3.8% YoY to US$58.3m, while PATMI dipped 56.7% YoY to US$11.9m. This was underpinned by a weaker gross margin, jump in opex, absence of a US$5.4m net fair value gain on derivatives which occurred in 2Q13 and a slump in the share of profits of JVs due to issues faced by one of its Mexican JVs. For 1H14, revenue slipped 5.0% to US$111.2m but PATMI rose mildly by 0.7% to US$48.5m. The latter formed 50.1% of our FY14 forecasts, but included a US$34.8m gain on disposal of vessels.

Slight delay in SSAV schedules
Management updated us that the commencement of work for its POSH Xanadu semi-submersible accommodation vessel (SSAV) has now been delayed from Dec this year to latest end-Jan 2015. This is because its customer Petrobras has required modifications to be made to the vessel. Delivery of its second SSAV POSH Arcadia has also been delayed from 4Q14 to Jan 2015. Although it has yet to be contracted, we understand that POSH is now in various stages of tendering for jobs in Gulf of Mexico, Brazil, West Africa and North Sea. Encouragingly, POSH’s discussions with Petrobras has revealed that the latter has additional requirements for three SSAVs in 2015. Hence, we believe POSH stands a good chance of securing a second contract with Petrobras in the coming months.

Lower FV but maintain BUY We lower our FY14 and FY15 PATMI projections by 18.9% and 13.5%, respectively. This is to take into account our reduced revenue forecast, a lower share of profits from its JVs and push back in contribution assumption from its SSAVs in FY15. Consequently, we derive a new fair value estimate of S$1.21 (previously S$1.40) for POSH, still pegged to 11x FY15F EPS. As POSH’s share price has corrected sharply in recent weeks, we believe a buying opportunity exists, with the stock trading at 9.0x FY15F EPS, an attractive 20% discount to its global peers’ average. Maintain BUY.