Pacific Radiance

UOBKayhian on 30 May 2014

FY14F PE (x): 9.8
FY15F PE (x): 8.6

Sterling performance. Pacific Radiance has appreciated by 38% ytd, thus outperforming the FSSTI (+4% ytd) by 34ppt. It is the best performing stock in Singapore oilfield services sector and second best performing in UOB Kay Hian stock universe, after Olam (+43% ytd) which is pending privatisation by Temasek.

A cut above the rest. Pacific Radiance’s key strength is its superior management’s ability to exploit opportunities to earn an above-industry return on its assets. Industry veteran CEO Pang Yoke Min was previously the CEO of Jaya Holdings (Jaya). He and his team built Jaya into Asia's largest offshore support vessel (OSV) builder. Second time round, Pang has built Pacific Radiance into an OSV owner-operator instead of an OSV builder, as Singapore OSV shipyards are no longer competitive. Pacific Radiance executes a virtuous-cycle business model. It maximises opportunities to squeeze exceptional return on assets by:

a) Building vessels directly in China. Vessel cost is at about 20% lower than buying vessels from middleman yards (eg. Nam Cheong, ASL Marine, etc) and the secondary market. Its ability to manage Chinese shipyards is key.

b) Positioning vessels in high-barrier-to-entry markets like Indonesia, Malaysia, Brazil and high-grown markets like Southeast Asia, Indochina, Australia and Mexico. Pacific Radiance also has a foothold in the subsea segment which is expected to be the largest-growth (300+% in 2013-17 over 2007-12) service segment.

c) Regular fleet rejuvenation and pruning to ensure its efficiency as an operator. Vessels are well thought out to suit future client needs before they are built. Any vessel that no longer fits client requirements is divested while it is still young. Given Pacific Radiance's market intelligence, it can sell vessels at high gross margins of 25-30% vs 15-20% earned by middleman shipyards. Constant dialogue with oil companies is an important feedback in its market intelligence gathering.

Maintain BUY and target price of S$1.55. Target price is based on 11.5x 2015F PE which is about 20% premium to the long-term (2004-current) 1-year forward PE mean of 9.5x for the OSV-owner segment. Looking at the big picture, Malaysian stocks are the most expensive, followed by international peers and then Singapore stocks. Indonesian stocks are still the cheapest but are catching up. Pacific Radiance's PE of 9.8x and 8.6x for 2014 and 2015 respectively are at a discount to international peers' 14.6x and 11.3x, despite its superior financials.