• Oil price rally positive, but insufficient to plug the challenges We downgrade our rating on Renaissance Services (RNS) to Sell to reflect: i) sustained challenges to OSV industry fundamentals despite the current oil price rally (rig utilisation weaker and OSV/rig ratio at its peak despite c1000 OSV vessels laid-up globally); ii) potential initial cost impact from Duqm project until 1H2017; iii) MCB dilution impact. We raise our fair value for RNS to OMR0.188 (18% downside) from OMR0.159 previously as we: i) raise our operating margin estimates due to the better than expected 1Q16 operating numbers; and ii) reduce MCB dilution impact. However, we believe RNS’s high correlation with oil price will continue in the short term and would be the key differentiator in share price performance.
• 1Q16 operationally ahead, but bottom-line misses 1Q16 operating profit of OMR11.9 million (+9% Y-o-Y, -4% Q-o-Q) was 9% above our estimate despite revenue coming in a tad lower than our estimate as its margin improved, which we believe was due to cost optimisation efforts. However, net profit after minority interest of OMR0.44 million (versus net losses of OMR0.7 million in 1Q2015, OMR29 million in 4Q2015) was lower than our estimate of OMR0.7 million as effective tax rate and minority interest were above our forecasts.
• Raise 2016 earnings estimate; dilution impact persists We raise our 2016 earnings estimate by 13% to OMR2.7 million as we: i) increase the marine segment operating margin by 200bps to factor in better than estimated 1Q16 operational figures; and ii) reduce interest cost estimate by 5%. The second tranche of Mandatory Convertible Bonds (MCB) will get converted to equity during August 2016 and we assume 6% dilution (18.7 million new shares) versus 10% previously, as we account for a higher conversion price. Nevertheless, additional selling pressure could arise after the conversion, which could adversely impact the share price. Moreover, any further provisioning for assets or derivatives liabilities will negatively impact our earnings estimates.

Sameer Kattiparambil