50% Drop From IPO Prices: What Does POSH Do? – Part 2

 

Following up from Part 1, today we will proceed further to explore the operations and touch on some of PACC Offshore Services Holdings Ltd’s (SGX:U6C) competitors.

Without further ado, let us present to you POSH’s operations:
POSH Has Four Main Business Divisions (Operations)

1) Offshore Supply Vessels

Offshore supply vessels or more commonly known as OSV supports mid to deepwater operations of rig and oilfield operators during the exploration and construction phase

Meaning: If you want to place your rig in the middle of nowhere, you need someone to bring your rig over and send you raw materials – POSH does this.

 

2) Transportation & Installation

Supports marine contractors in construction and maintenance of oilfield infrastructure and pipelines

Meaning: Once your rig is in place in the middle of nowhere, oil doesn’t come magically. You still need to set up the pipelines and other stuff before you can begin operations – POSH does this.

 

3) Offshore Accommodation

Operates a young and growing fleet of four offshore accommodation vessels providing a range of solutions that supports offshore activities

Meaning: Basically, when you have a rig in the middle of nowhere, you will need somewhere to stay and space to move around – POSH does this

 

4) Habour Services & Emergency Response

Offer emergency response services which include salvage, wreck removal, rescue and oil-spill response services

Meaning: Accidents happen and someone would come to the rescue – POSH is one of two main OSV operators globally to offer such services

 

And this was how their revenue breakdown looked like:

Their OSV segment with over 50% contribution for FY2013 was POSH’s largest segment in terms of revenue.

 

And this was how it looked from a Gross Profit Margin point of view. Gross profit margin or GPM was essentially Gross Profit (Revenue-Cost of Goods Sold) divided by Revenue to show you how much you are making after you deduct the amount that you pay for your products!

However we always want to know what the bottom line is so Operating Profits is of keen interest to us as investors! Operating Profit is essentially what profit you get after the deduction of your cost of goods sold as well as your operating expenses which include your administrative costs (Salary and the kind), your overheads (General operations) and also your selling costs (Advertising, marketing, etc).

In terms of absolute profit, OSV once again took the top spot with close to 43% of segment results (Which could loosely be translated to the operating profits of the various segments).

But if we were looking solely at profitability, Offshore Accommodation was where there was the most bang for their buck with this business leading the way with a whopping OPM of 50% with the other three in the region of 20-30%.

 

Competitors!

However we always, always, always have to remember that ratios are all relative and we have to compare it to its relevant peers.

For instance, you can’t compare a hypermarket with an OPM of say 5% and say that it’s not as good as a menswear apparel business with an OPM of 15%. It just isn’t an apples-to-apples comparison! It’s like judging a fish for its ability to climb trees!

The following was a list of POSH’s competitors as listed in their IPO prospectus.

The difference between POSH’s vessels operated (112) and vessels owned (67) was because of the Joint Venture arrangement POSH had with companies like PT. Win Offshore, Nimitrans Pte. Ltd., POSh Terasea Pte/ Ltd and many more!

 

How Can A Company Like POSH Be Valued?

In our opinion, valuation is more of an art than an exact science, like fingerprints, no two people would arrive at the same exact figure. This was solely because we would have a different perception and thus a different opinion on the business. It boils down to your personal assumptions of the business.

What we can show you are some ways to approach the issue!

Like ratios, peer comparables such as P/E and P/B are useful when the operations of the businesses are similar in nature. From our list above, based on the vessels operated, only Swire Pacific Offshore Operations Pte Ltd, Bumi Armada Bhd (BAB:MK) and Mermaid Marine Australia Offshore Ltd (ASX:MRM) appeared to be in all five operations POSH was engaged in.

For simplicity sake, these three should in theory be more “relevant” peer comparables if we were viewing the companies as a whole. The difficulty of this would be getting the figures as Swire Pacific Offshore was a private entity, Bumi Armada was listed in Malaysia and Mermaid Marine Australia was listed in Australia. Thus depending on one’s perceptions, adjustments may have to be made to the ratios.

Another method that we can approach valuation would be the Sum-of-the-parts aka SOTP valuation. What this essentially meant was we could split POSH into its four business segments and value each part on its own before adding them all up.

Some other points to note when using a peer comparables method to conduct valuation. Once we have decided on a certain peer multiple, we have to be very careful of some differences including:

1) Financial strength: An overleveraged company would more often than have a lower valuation

2) Size: In such an industry, size definitely matters. Comparing a company with 100 vessels to one with only 10 even if it’s in the same industry would definitely require adjustments to be made

3) Areas of operation: Companies operating mainly in a certain area might have certain characteristics differentiating them from other parts of the world. As a note, POSH operated primarily in the South East Asia region.

 

Value In Action

After touching on POSH’s operations and competitors in Part 2, we would move on to Part 3 where we would explore some of POSH’s operational strengths.  

 

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All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any shares in the companies mentioned above.

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