Equity Research

9 April 2014 Camilia Goh, CFA CAIA

IPO Comments

Executive Director, Equity Research  (65) 6818 7283  [email protected]

PACC Offshore Services Holdings Ltd Singapore | Energy Equipment & Services

Key Points

Company Snapshot

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Neutral view – More suited for aggressive investors. The indicative pricing range implies 16-17.6x FY14E PER & 8.79.5x FY15E PER, close to sector peers’ estimated 9-10x FY15E PER. The strong projected earnings growth in FY15 assumes timely delivery and securing of charter-out contracts for two semisubmersible accommodation vessels (51.7% PATMI CAGR forecasted from FY13-FY15F, 10% & 70.7% revenue growth in FY14 & FY15 respectively, driven by full year contribution expected from the 2 new SSAVs). POSH will enter the semisubmersible accommodation market with 2 newbuilds (POSH Xanadu & POSH Arcadia), the first will be delivered in 2H14 (currently undergoing negotiations). The order of the 2 SSAVs marks the group’s expansion into such high berth vessels. In terms of industry dynamics, Infield foresees a level of undersupply of SSAVs in 2014 due to a peak in demand from robust activity in Norway, demand is expected to soften slightly post 2014 before rising in 2016.

PACC Offshore Services Holdings Ltd (POSH)

Description: Largest Asian based provider of offshore support vessels and one of the top 5 globally (according to industry consultant Infield’s data based on number of vessels operated), with a diversified fleet servicing offshore oil and gas exploration and production activities. The company’s offshore support vessels perform anchor handling services, ocean towage and installation, ocean transportation, heavy-lift and offshore accommodation services, as well as harbour towage and emergency response services. Revenue is earned from the time charters of its vessels, as well as lump sum project contracts for which its vessels are deployed. Customers include major oil companies and large international offshore contractors.

Est. Market Cap

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FY13 revenue breakdown estimates: Offshore Services Vessels 50.7%, Offshore accommodation 12.4%, Harbour services and emergency response 9.4%, transportation and installation 27.4%. Strengths include an experienced management team, and being a member of the Kuok Group, a conglomerate in Asia with diversified interests in commodities, hospitality, logistics, real estate and shipping, which provides POSH with access to affiliated shipyards of the group to better manage turnaround times for newbuilds and maintenance costs, group’s connects

Security Information Bookbuilding price range Global offering size

S$1.13 - S$1.24 per share Indicative tranching of base deal size of up to 337,625,000 shares of which: · Placement – Up to 196,820,000 shs · Cornerstones – Up to 85,605,000 shs · Reserve - Up to 25,200,000 shares · Singapore Public Offer - Up to 30,000,000 shares

Gross Proceeds (base offering)

US$304 – 334mm (SG$382 – 419mm)

Listing

SGX-ST, Main Board

Expected listing date

25 April, Fri

Cornerstone Investors

Approx S$2,057m – S$2,257m (based on post IPO POSH’s share capital of 1,820,000,000 shares) Hwang Investment Management Berhad Fortress Capital Asset Management (M) Sdn Bhd

Repayment of part of the outstanding amounts under POSH’s revolving Use of proceeds facilities which have been used for working capital and capital expenditure purposes. Joint Issue BofA Merrill Lynch Managers, DBS Bookrunners & OCBC Bank underwriters Source: Company, brokers.

For more details, please refer to the preliminary prospectus on MAS Opera website

For trade related queries, please contact our dealing desk directly.

Equity Research – Research Note and network and lower financing costs. Its young deepwater and midwater AHTS/PSV fleet amongst large owners, with average age of less than 3 years (younger than sector average) is also a competitive advantage as modern vessels are viewed to provide better reliability, efficiency and adherence to environmental and safety standards. 

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Fleet size to increase to 125 by 2015 - As of 31 Dec 2013, the company operated a combined fleet of 112 vessels, which is expected to rise to 125 units by end 1Q15, based on scheduled deliveries (comprising two deck cargo barges, two Azimuth Stern Drive (“ASD”) harbour tugs, three DP2 accommodation vessels, three Dynamic Positioning (”DP”) 2 or DP2 AHTS, two DP3 Semi-Submersible Accommodation Vessels (“SSAVs”), and three vessels which its joint ventures have on order). Growth catalyst in FY15, with delivery of two 750-person DP3 SSAVs (semisubmersible accommodation vessels), estimated to potentially double its earnings base in FY15F assuming deliveries are on track and charter-out contracts are secured on time. As per prospectus, the company is in the final stages of procuring a charter contract for the commercial deployment of one of the vessels when it is delivered. The execution of the charter contract is pending the completion of due approval process of the counterparty. The vessels are expected to capture demand for high capacity and high specification accommodation vessels catering to the deepwater segment. When all of the accommodation vessels that are under construction or undergoing conversion are delivered by late 2014 and 1Q2015, its accommodation capacity is expected to increase from 879 persons to 3,291 persons (this includes one 191-person accommodation vessel that is committed for sale). According to Infield, as at the close of 2013, there were only three operational SSAVs with berth capacity of more than 600-person and another three on order or under construction (including POSH’s two 750-person DP3 SSAVs). Upon the delivery of the two DP3 SSAVs, POSH is expected to operate the youngest high-berth accommodation vessel fleet globally.

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The debt to equity ratios of the group were 1.05: 1, 0.99: 1 and 0.93: 1 for FY2011, 2012 and 2013 respectively. As of 31 Dec 2013, total borrowings were USD807.4mln, which will be reduced to close to USD500mln post IPO. The company is expected to re-leverage thereafter to fund further expansion, and has guided it will continue to have a significant amount of borrowings given the industry’s capital intensive nature.

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Negative working capital for FY11 and FY13 respectively due to the manner it funded its vessel related capex (relied on equity capital, cashflows from operations and bank borrowings). Bank borrowings were drawn under credit facilities of which 68.4% is uncommitted, and remaining 31.6% is committed for a fixed term. The amounts drawn under the uncommitted portion of its facilities are subject to variation or cancellation by lenders any time, which will become due and payable (potential short term debt repayment concerns in a worst case scenario).

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Valuations – The indicative pricing range implies estimated 16-17.6x FY14E PER & 8.7-9.6x FY15E PER (due to

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Financial Summary (USD’000) Year ending Dec 31st

2011

2012

2013

Revenue

240950

242966

237263

COGS

185542

181892

164872

Gross Profit

55408

61074

72391

Profit before tax

25961

54460

77358

Net profit

26218

53520

73371

Diluted EPS

2.18

4.33

4.95

Revenue by segment (USD mln & %)

2011

2012

2013

85.3 (35%)

91 (37.4%)

120.3 (50.7%)

T&I

103.5 (43%)

100.1 (41.2%)

65.1 (27.4%)

Offshore Accomodation

22.2 (9.2%)

23.2 (9.6%)

29.5 (12.4%)

Harbour Services

29.9 (12.4%)

28.7 (11.8%)

22.4 (9.5%)

Offshore Supply Vessels

Source: Company

The preliminary prospectus may be accessed on the OPERA website at the following link: https://opera.mas.gov.sg/ExtPortal/Public/S D/SearchOffers.aspx?idx=SHR

For trade related queries, please contact our dealing desk directly.

Equity Research – Research Note assumptions for higher earnings growth from the 2 SSAVs to be delivered), which is close to sector peers trading at about 9-10x FY15E PER. There is no direct comparable within the sector, some Singapore listed offshore service providers own and operate OSVs such as Ezra but have significant other businesses such as deepwater subsea services. Regional peers/listed OSV operators include Bumi Armada, Alam Maritim and Wintermar Offshore. Key Risks Include:  Oil price volatility, regulatory risks, equity raising risks, irrational competition, delivery delays, potential oversupply risks in a fragmented OSV market, operational issues including delays in securing charter-out contracts, rising interest rates. The nature of the capex intensive business may also stretch its balance sheet, while significant delays may impact expected revenues. Valuation Comparison

Source: Bloomberg estimates This research paper provides an analysis of a specific security taken in isolation. It does not taken into account the reader’s overall portfolio in regard to his investment objectives, risk tolerance, portfolio diversification, and particular needs. We advise the reader to seek the assistance of the relationship manager or the Investment Counselor whether the advice is appropriate in the light of existing holding in the portfolio and/or the investment needs. SHAREHOLDING DECLARATION The analyst who wrote this report does not hold shares in the above security. RISK RATING (1) Very Low Risk, (2) Low Downside Risk, (3) Moderate Downside Risk, (4) High Downside Risk, (5) Very High Downside Risk The description of risks in this document does not purport to be an exhaustive list of the risk factors associated with the investment in the financial Products mentioned in this document. Prospective investor should consider all risks carefully prior to investing in the Product and consult an independent financial adviser as necessary before dealing with any financial Products mentioned in this document. DISCLAIMER This document, prepared by Bank of Singapore Limited (Co Reg. No.: 197700866R) (the “Bank”), is for information only and is not an offer or a solicitation to deal in any of the financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products. You should independently evaluate each financial product and consider the suitability of such financial product, taking into account your specific investment objectives; financial situation or particular needs and consult an independent financial adviser as necessary, before dealing in any financial products mentioned in this document. This document may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Bank’s prior written consent. This document is not intended for distribution, publication to or use by any person in any jurisdiction outside Singapore or such other jurisdiction as the Bank may determine in its absolute discretion, where such distribution, publication, or use would be contrary to applicable law or would subject the Bank and its related corporations, connected persons, associated persons and/or affiliates (collectively, the “Affiliates”) to any registration, licensing or other requirements within such jurisdiction. This document and other related documents have not been registered as a prospectus, profile statement or product highlight sheet registered or lodged with the Monetary Authority of Singapore or any other regulator. Investment decisions should be made on the basis of information contained in the prospectus, or formal offer document. While reasonable efforts have been made to ensure that the contents of this document has been obtained or derived from sources believed by the Bank and its Affiliates to be reliable, the Bank, its Affiliates and their respective officers, employees, agents and representatives do not make any express or implied representations or warranties as to the accuracy, timeliness or completeness of the information, data or prevailing state of affairs that are mentioned in this document and do not accept any liability for any loss or damage whatsoever, direct or indirect, arising from or in connection with the use of or reliance on the contents of this document. The Bank and its affiliates may have issued other reports, analyses, or other documents expressing views different from the contents hereof and all views expressed in all reports, analyses and documents are subject to change without notice. The Bank is a licensed bank regulated by the Monetary Authority of Singapore. The Bank, its employees and discretionary accounts managed by the Bank may have long or short positions or may be otherwise interested in any of the financial products (including derivatives thereof) referred to in this document. The Bank forms part of the OCBC Group (being for this purpose OCBC Bank and / or its subsidiaries, related and affiliated companies). Companies in the OCBC Group may perform or seek to perform broking, banking, and other investment or securities-related services for the corporations whose securities are mentioned in this presentation as well as other parties generally. Past performance is not always indicative of likely or future performance. All investments involve an element of risk, including capital loss. Persons who are interested to invest in financial products should read the risk disclosures and governing terms and conditions that are set out in the relevant offering documents.

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