Saturday, 9 November 2013

Pacific Radiance Ltd

Before you read further, please note that Mr. IPO is vested in this company from the placement tranche. Do not continue unless you are perfectly happy to have a biased view.



Pacific Radiance Ltd ("Pacific Radiance" or the "Company") is offering 171.875m new shares at $0.90 each, of which only 5m shares are for the Public and the rest is via placement. The IPO will end on 11 Nov 2013 at 12pm and list on 13 Nov 2013 at 9am. The market cap will be S$653.2 million. The link to prospectus is here.

Principal Business

The Company is a young offshore service support provider and owns and operate a diverse fleet of offshore vessels that support oil and gas projects.


The Company operates on the principal of 3Rs. Relevant, Reliable and Responsive. Hope the 3R can also mean Right Management, Right Business and Right Valuation? 


There are 3 business segments:
  • Offshore Support Services Business
  • Subsea Business
  • Complementary business such as marine equipment and project logistics
Industry Outlook

Personally, I do like the oil and gas sector. The key points will be:
  • Oil will always be in demand and oil reserves are always viewed very strategically 
  • There are many untapped reserves in the region and you can see KrisEnergy and Rex International busy looking for oil reserves in this region. The increased activities bode well for companies such as Pacific Radiance 
  • Oil and gas projects are usually very long term in nature and that means that in order to lock in vessels, Pacific Radiance will enjoy long term chartering contracts. This translate into a steady stream of cash flows for the assets.
Financial Performance


The financial results have been very impressive and the revenue grew by a CAGR of 48% (in case you don't know, CAGR is pronounced as "K-Girl" or known as Cumulative Annual Growth Rate) from US$59.8m in FY2010 to US$130.8m in FY2012. The first half of 2013 continue to show a 23% growth to US$77.6m. 

The net profit after tax was even more impressive once the Company reaches a certain scale. It grew from US$14.8m in FY2010 to US$32.2m in FY2012. The first half of this year was even more impressive, growing 178% from US$10.7m to US$29.8m for the 1H 2013. In fact, the first half profit is almost equal to prior year's profit. 

Use of Proceeds

The bulk of the proceeds will be used to acquire new vessels and to pay off existing financing and UOB probably got the mandate to manage this IPO because of its close business relationships with the Company.


Valuation Metrics

Book building
The book building range was from 81 cents to 93 cents and the final strike price was 90 cents. According to my sources, the book was very well covered and they decide to give more shares to "Tier one" institutional investors and cut back the allocation to the rest. In this regard, many retail investors who put in orders via their brokers or remisiers were cut and these retail investors will have to prove that they are accredited investors before they are being allocated any shares. One of my brokers in UOBKH was allocated only 2 lots and asked me if i want to subscribe.

Price to Book
According to the prospectus, the NAV per share post IPO will be around 61.9 cents. Based on the IPO price of 90c, the price to book is around 1.45x. Not exactly "good value" but you are not expecting the cash rich owners to sell you at book value, do you? 

Price Earning

The earnings per share based on the enlarged share capital and service agreement, will be around Singapore 5.4 cents. That translates into a historical PER of 16.6x. It is not cheap but not applicable given that the first half earnings is around 92% of last year's earnings. 

Given that the first half of 2013 has shown such strong traction with profit growing by more than 100% and that 2H of the year is typically "stronger", i will be more conservative and assume a doubling of EPS to Singapore 10.8 cents for the entire year. That translate into a forward PE of around 8.3x, which in my view, is reasonable for a company showing such good "K-Girl". 

Well diversified revenue base


You can see that the revenue is derived from Asia (58%), Africa (18%) and Australia (15%) but a closer look shows that it is truly well diversified and not over-reliant on any country.

Management Team

Some questions have been asked about the management team and whether they have caused Jaya's troubles in 2008. The answer is no. Jaya Holdings was sold to a private equity fund managed by Affinity in 2006. The news is here. The PE firm probably mis-managed the operations and took on too much leverage which resulted in its financial trouble during the global financial crisis in 2008. Affinity then sold Jaya for a big loss to a consortium led by Deutsche Bank in 2011. The news is here. Jaya Holdings has since emerged from the scheme of arrangement and announced dividends for the first time. The news is here.

As such the founders of Pacific Radiance have nothing to do with the troubles at Jaya. Pang Yoke Min may instead have used the cash he received from the sale of Jaya Holdings to kick start Pacific Radiance by buying over the majority stake from Mr. Mok Weng Vai. Mr. Pang will continue to own 64% of the company post IPO.

It is also interesting to know that the founders are taking a pay-cut post IPO. For a company of this revenue and profitability, i would expect them to get more pay but they have actually took a pay cut in 2013 leading to the IPO. Good corporate governance and in-line with shareholders' interest.



Competitors

Let's take a quick look at the competitors and what they are trading at. I think the closest competitors should be Jaya, Nam Cheong, Ezion and Swiber.

The table below is generated from Capital IQ.


Pacific Radiance is going to IPO at price to book of 1.45x, that is more expensive than Swiber and Jaya but cheaper than Nam Cheong and Ezion.

Assuming the fair forward PE range for Pacific Radiance should be between 9x to 11x, the fair value range of Pacific Radiance should be between 97 cents and 119 cents. 

What I like about the Company
  • Serving the Oil and Gas sector
  • Proven and competent management
  • Strong revenue growth and profit momentum
  • Well diversified revenue base
  • Fair valuation
My Concerns
  • Competitive landscape
  • How long will the revenue and EPS growth last
My Chilli Ratings

Overall, i like this company and i think there should be some upside from here. I will give it a 2 Chilli rating. Having said that, the float is pretty small at only 5m shares. In this regard, the probability of getting the shares will be limited. Please note that i am vested.

8 comments:

Anonymous said...

Many thanks for the write up...

jazz bary said...

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Anonymous said...

Thank you, I have bid for 20 lots lol, hope to get lucky this time! :-D

Anonymous said...

The closest comparable is Miclyn (MEO). A 'Spore' co listed in Australia. Headland and Champ has recently offered to buyout and privatize @ about 8-9x FY14 earnings. So Pac Rad not cheap...

Anonymous said...

bid for 100 lots.

got 0 :)

Anonymous said...

Overall good basic coverage...but you miss out some important points:

1) Most of the earnings are propped up by sale of vessels to JVs/associate companies in Malaysia/Indonesia because of cabotage rules and not from chartering of their vessels which is thei main business. This is akin to pre-recognizing earnings. Core P/E is way higher than you calculated.

2) Founders taking a pay cut? Look at how the chairman's son is taking a basic salary + allowance of $25k/mth not counting bonuses. I am not sure if any 30 year old with only 4 years of working experience is worth that much other than really top traders and wall street ibankers.

It only looks reasonably priced on the surface. I am not a fan.

Mr. IPO said...

Thanks for the comments. :)

Anonymous said...

Bid for 101 lots, got 6.

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