Morningstar | Another Write-Down for Swire Pacific Offshore Group Not a Surprise
Swire Pacific announced yet another write-down of HKD 3.9 billion for the marine services division as the company reviewed the carrying value of its vessels. This is on top of an HKD 2.31 billion write-down in 2016 and HKD 1.02 billion in 2017. Excluding the write-down, first-half losses totalled HKD 663 million for the division, largely in line with HKD 692 million in the year-ago period. We expect more losses to pile up for the remainder of 2018, which should track similarly to losses of HKD 720 million in 2016 and HKD 1.24 billion in 2017.The write-down was not a surprise, as we noted at the first-half result. The key issue is the low utilisation rates of the vessels despite a recovery in the oil price. There is no change in our view that a high oil price has to be sustained for a period of time for oil producers to commit to capital expenditure. This is particularly true for deep-sea exploration, where producers require an oil price of at least USD 80 to be profitable. We still believe that a recovery in utilisation rate is unlikely in the medium term and the marine division will continue to post losses in the medium term. Our oil and gas team still assumes a long-run oil price of USD 60.
Our fair value estimate of HKD 87 is unchanged, and we believe the conglomerate is fairly valued. We previously upgraded our fair value estimate at the fiscal 2017 result in March, and the stock price has rallied strongly from our 4-star rating at the time. We still expect a recovery in Cathay Pacific as a near term catalyst for Swire Pacific. Year-to-June data for Cathay Pacific is encouragingly and is showing the recovery in 2017 is sustained. Revenue per passenger kilometres was 2.5% for the first half of 2018, compared with 2.6% for 2017. Passenger load factor was largely steady at 84.2% compared with 2017, while cargo load factor was 68.3% for June, compared with 67.8% last year. The airline’s unfavourable fuel hedges will progressively roll off in 2018 and 2019.
Swire Pacific is a holding company. Co. operates in five divisions: property, which is engaged in developing, owning and operating mixed-use, principally commercial properties in Hong Kong and Mainland China; aviation, which comprises investments in the Cathay Pacific group and the Hong Kong Aircraft Engineering Company group; beverages, which manufactures, markets and distributes refreshing soft drinks; marine services, which invest in vessels and equipment and develop its services with a view to providing offshore support to the global oil and gas industry; and Trading & Industrial, which markets and sells internationally branded goods to consumers.
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