Highlights

We believe the market is undervaluing the potential of the drilling segment in Malaysia which is underpinned by massive drilling activities (~22 rigs operating in 2012 and expect to rise to 38 by end 2013) and asset localisation. Perisai is one of our top picks in drilling sector. (Detailed in our report titled “Drilling Tsunami” dated 05 June 2013.)

Recent newsflow reflects that positive sentiment towards drilling is intensifying, reconfirming our view: i) Coastal Contract acquired its first jack up drilling rig for US$200m (expected to be delivered by 3Q14), ii) UMW O&G bought a new jack up drilling rig for around US$223m (expected to delivered in May14) and iii) Newsflow on Tanjung Offshore to look at potential acquisitions on a drilling company.

To recap, Perisai has ordered 2 high specification jack-up drilling rigs (cost US$208m each) which are expected to be delivered in May 14 and Apr 15. Both rigs are capable of operating in water depths of up to 400 feet and equipped to drill high pressure and high temperature (HPHT) wells as deep as 30,000 feet.

Comment

The recent increased interest in drilling rigs suggests huge opportunity especially for locally owned drilling rigs. Channel checks indicate a total of 8 drilling contracts are expected to expire in 2014, this will open up opportunity for locally owned rig. Currently, only 1 in 3 operating rigs is Malaysian owned. Petronas prefers locally owned rigs, consistent with its localisation policy. We believe Perisai will be one of the beneficiaries and market concerns about failure to secure contracts are overdone.

Based on our assumption of i) US$160k daily charter rate and ii) 80% utilisation rate and iii) net margin of 30%, one rig will add RM42m to Perisai’s net profit pa. Total earning is expected to grow at CAGR of 23% from FY2013 to FY2016.

The impending UMW’s IPO in 2H13 could also drive sentiment and serve as a potential re-rating catalyst for drilling related stocks. We do not rule out the possibility of higher UMW O&G IPO valuations driving up the P/E multiple for drilling related stocks. We also like Scomi Energy (BUY) and SapuraKencana (BUY, 1Q result expect to release on 28 Jun (Friday), normally weaker due to monsoon).

We continue to like Perisai’s strategy to ride on Petronas’ O&G asset localisation directive by securing long term charter contracts for O&G assets, building and commission the assets and chartering the operation to experienced operators like its rig operator KCA DEUTAG. KCA DEUTAG is one of the largest rig operators in the world.

Catalysts

• Securing drilling contracts before the rig delivery
• UMW’s IPO in 2H13 likely re-rate the drilling related companies
• Marginal oilfield win

Risks

Political risk, Execution risk.

Valuation

We maintain our BUY call with an unchanged TP of RM2.00 based on 16x FY/14 EPS of 12.5 sen/share.

Source: Hong Leong Investment Bank Research - 26 Jun 2013