• We initiate coverage on Reservoir Link Energy Berhad (RL) with a BUY recommendation premised on (i) its favourable prospects from well services, and (ii) growth potential in both the O&G and RE space.

• The company is a good proxy for exposure in the emerging upstream decommissioning activities and solar RE construction projects. We are optimistic that these segments could sustain its earnings in the long run.

• We value RL at RM0.52 based on relative peer valuation and SOP methodology. This implies 13x FY23F P/E, offering 53% upside and therefore, a BUY call. We think it’s timely to revisit the stock as the stock price has dropped below its IPO price of RM0.41.

A leading local player in well perforation service

We like RL due to its rising position in the local upstream well services space which is typically dominated by foreign players such as Halliburton and Schlumberger. We opine that the rising requirement for local content by regulators would augur well for the company. Besides that, RL is capable of generating recurring income from well perforation and well leak repair services which are normally cushioned from the downturn in upstream capex spending.

Pursuing growth in emerging and trendy market

We believe RL has a good growth prospect in the long term to be driven by new growing markets such as well decommissioning activities as well as solar RE projects. The steady stream these jobs could future-proof its earnings in the long run.

To return to profitability in 2QFY22

The company recorded its first quarterly losses since IPO listing in 1QFY22 mainly due to the completion of its PWC service in Mauritania as well as seasonally lower offshore activities in 1Q due to monsoon season. We expect RL to return to profitability in coming quarters as upstream activities may normalize, to be supported as well by income from RE solar projects. We forecast RL to achieve PATAMI of RM5.9m/RM11.7m/RM16.1m in FY22F/FY23F/FY24F.

Initiate with a ‘BUY’ call and TP of RM0.52

We initiate coverage on RL with a BUY recommendation and TP RM0.52. Our TP is based on its relative valuation of peer companies and sum-of-parts (SOP) methodology. Our TP implies 13x FY23F P/E which is above its local peers average P/E of 8x but below its global peers average P/E of 17x. We think this is fair given its large prospects in solar RE business as well as stability in its core well services.

Source: BIMB Securities Research - 14 Jun 2022