Maybulk/POSH - solid recovery

The listing of PACC Offshore Services Holdings (POSH) – Maybulk’s 21.23% associate – is finally getting off the ground.

Observers see a “solid recovery” in Maybulk’s heretofore loss-making dry bulk segment, and the stock (28 Feb 2014) could be a cheaper and earlier entry into POSH’s initial public offering (IPO).

Depending on the terms of the share sale, there is a potential for special dividends as well. However it is unsure whether Maybulk will divest its stake in the unit through this listing. Should this be the case, the gains could be paid out as dividends or utilised for more vessel acquisitions in the future.

POSH’s Singapore Exchange-listed peers like Ezion Holdings Ltd, Ezra Holdings Ltd, Mermaid Maritime PCL and Swiber Holdings Ltd are trading at forward price-earnings multiples of as low as 6.21 times to a high of 14.42 times, or an average of 9.88 times.

POSH’s IPO valuations could scale higher, given the strong earnings growth prospects as it doubles its fleet in the next three years from Feb 2014.

In late Feb 2014 it was reported that POSH’s advisers have started investor education, with the pre-marketing to last two weeks before the formal launch of the IPO. The report said POSH could raise up to US$400mil (RM1.31bil).

To recap when news of the listing first emerged in July 2014, Maybulk was better off exercising a put option to sell back its interest in POSH to the vendor at a 25% premium to its cost. Yet, POSH’s bankers are brandishing a US$1.6bil-US$1.8bil (RM5.25bil-RM5.9bil) valuation based on its projected earnings. That gives Maybulk’s stake a value of between US$340mil and US$382mil (RM1.12bil-RM1.25bil) come 2015.

Maybulk essentially has three avenues to cash out of POSH. In 2008, Maybulk had bought the 21.23% stake from its biggest shareholder Pacific Carriers Ltd for US$221mil (RM724.88mil).

There was a caveat: if POSH wasn’t listed by the end of 2013, then Maybulk has six months by which to exercise a put option to hive off its shares at 125% of its cost, or US$276.25mil (RM906.1mil).

Pacific Carriers also has the right to take POSH off Maybulk’s hands at a 50% premium to the latter’s cost, or US$331.5mil (RM1.09bil), valid for six months following the expiry of the put option period.

Alternately, Maybulk can stick with POSH and ride on the offshore supply vessel (OSV) operator’s growth as a listed concern. It is yet to be known, however, if the IPO will dilute some of its interest.

So, what will Maybulk choose?

Under the previous scenario, with POSH priced at a speculated US$1bil-US$1.3bil (RM3.28bil-RM4.26bil), Maybulk’s stake would have been worth between US$212mil and US$276mil (RM695.36mil-RM906.1bil), barely touching the US$276mil (RM906.1mil) implied under the put option.

Should the IPO fail to live up to “market expectations” – referring to POSH’s minimum value of US$276mil (RM906.1mil) for a 21.23% stake as dictated by the put option – Maybulk’s shares could buckle under pressure.

This is because many have used the US$276mil (RM906.1mil) price tag as their yardstick for Maybulk’s sum-of-parts (SOP). But the US$276mil (RM906.1mil) minimum valuation no longer appears to be an issue, helped by the upward re-rating of Singaporean OSV stocks since 2013.

However industry observers pegged (Feb 2014) POSH at 15 times earnings, putting Maybulk’s stake at US$310.98mil (RM1.02bil) on the basis that POSH will be worth S$2bil (RM5.18bil) upon its debut.

The Singapore-headquartered POSH, which has one of the largest OSV fleet in the region at over 100 vessels, is known as an industry leader in the marine towage market.

Its fleet is a mix of platform supply vessels, accommodation vessels, semi-submersible barges, harbor tugs, and tugs and barges.

POSH’ earnings contribution has helped Maybulk stay afloat since the post-crisis years, when many shippers went bust as global trade reeled from the credit crunch.

Maybulk’s main dry bulk unit has bled red ink for the past two years now, with pre-tax losses widening to RM25.61 in 2013 from RM9.54mil the year before. But associate earnings from POSH surged, rising by more than 50% to RM54.42mil from RM35.26mil.

Observers also expect Maybulk’s core shipping business to remain under water at least until the end of 2014 although the losses will likely narrow from 2013.