• MCBs dilute FV; lack of immediate catalyst We lower our fair value on Renaissance Services (RNS) to OMR0.159 from OMR0.210 as we: i) cut our earnings estimates by 7% on average over our forecast horizon; and ii) assume Mandatory Convertible Bonds (MCB) worth OMR2.76 million (related to second tranche; RNS bought back 78% of it) will be converted to equity in FY2016 (dilution of c10.0% by adding c27.5 million shares to existing shares). Nevertheless, the highly levered balance sheet (net debt/equity at c2.9x) limits further growth potential and is a key concern, particularly given the volatile oil price environment, in our view. RNS trades 7% above our FV; hence, we maintain our Neutral rating.
• Marine under further pressure, CSG to remain stable Management confirmed it is in negotiations with clients on the value of long-term contracts. We believe this will lead to an 8% Y-o-Y cut in the 2016 vessel rate. We assume 80% vessel utilisation (versus 84% in 2015e) and expect a 16% decline in marine operating profit (to OMR33.2 million). Nevertheless, we believe its long-term contract profile and reduced vessels in the West African spot market will limit sudden growth in the avg. day rate even if oil bounces back, but it would positively impact utilisation levels. We expect the contract service segment (CSG) to deliver clean operating profit of OMR12.3 mn (+7% Y-o-Y) in 2016 on back of margin improvement (110bps) due to its long-term contract in its home market.
• Further equity dilution, provisions are key risks RNS holds OMR12.73 mn MCBs (third tranche of its OMR43 mn issue) on its book, which is due for conversion in August 2017. Even though we expect management would buy back the bulk of the MCBs, similar to the first two tranches, any conversion / dilution would impact our FV estimate. Moreover, the continuous low oil price may prompt further write down in its assets’ value (RNS already write off OMR27.3 mn worth of marine vessels or 7% of marine assets), which would potentially affect debt covenants.

Sameer Kattiparambil