Perdana Petroleum; Fully Valued; RM0.835
Price Target: RM0.55; PETR MK
Ceasing coverage

Despite the pick-up in O&G activities in Malaysia, we believe that Perdana Petroleum’s quarterly earnings ahead are unlikely to be promising given persistently high operating expenses. Assume that we adjust for its off-balance sheet lease payments totaling RM433.7m as at Dec11, its net gearing level will balloon to 1.4x from 0.4x. This is a major risk to the company in view of the poor operating result.

There is no sign of strong recovery in the near term for Perdana Petroleum in view of the supply glut of small-sized vessels and unfavourable charter rates due to stiff competition. Therefore, we opine that heavy operating expenses will continue to weigh down its results. At 0.6x projected FY12 interest coverage ratio, it hardly provides any comfort and any disruption to its operations will severely affect its financial performance.

We do not expect strong earnings improvement for Perdana Petroleum in FY12 as we believe that the high operating expenses will continue to undermine its performance. Unless charter rates increase drastically (unlikely in the near term), Perdana Petroleum will have to strive hard to more-than-cover its operating lease payments. We cease coverage on Perdana Petroleum. Our last call for Perdana Petroleum is Fully Valued with RM0.55 TP. We prefer Perisai over Perdana Petroleum given Perisai’s strong earnings visibility and potential catalyst coming from asset acquisitions.

Source: HwangDBS Research - 24 April 2012