Company Insight

We recently met management for an update on the company after Perisai secured a 1.5month charter extension for its Derrick Lay Barge, Enterprise 3 (E3). We gather from the management that the E3 was likely to extend until Dec 2013. The new Pan Malaysia T&I job is under tendering now, success in TL Offshore (TLO) bid will likely further extend the contract for E3.

Perisai is still in the process of negotiating with Petronas on the extension of Rubicone MOPU, the primary terms of the contract will end on 30 Sep 2013. As we understand, the Bekok production platform still under refurbishment. Hence, it is likely that the MOPU contract will be extended for another year, to ensure production flow. In the event that the contract is not extended, there will be around 6 months idle period (with around RM0.2m burn rate per month) before securing another new contract. The company are looking at opportunity from ASEAN to re-deploy the MOPU if the contract is not extended.

The management also shared their bullish view on the drilling segment. Exploration and production activities are increasing globally. The company will focus on Malaysia market given the shortage of locally owned rigs. The management expects to secure rig contracts 3-6 months before delivery date. Management also guided 30% earnings growth for next 2 years.

Comment

We came away from the visit positively given the huge opportunity from the drilling rig business despite the potential short term hiccup if the MOPU is not extended. In the event that the MOPU is not extended, the 6 months idle period has RM12m (include the maintenance cost) negative impact to net profit for FY13 and FY14 respectively. Our net earnings will reduce by 12.4% and 9% for FY13 and FY14 respectively. Our target price will reduced to RM1.82, which still provides 14% upside from current level. We are optimistic that the MOPU is likely to get extension for another year.

Future growth is set to continue with the delivery of an FPSO in Sep 2013, a pacific class 400m jack up rig in mid-2014 and the option on an additional rig in mid-2015. The FPSO and new rig businesses are expected to contribute 47% and 67% of total earning in FY14 and FY15 respectively. Channel checks indicate a total of 8 drilling contracts (currently operated by foreign-owned rigs) are expected to expire in 2014, this will open up opportunity for locally owned rig. We believe Perisai will be one of the beneficiaries and market concerns about failure to secure contracts are overdone.

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 SapuraKencana (BUY) and Scomi Energy (HOLD due to recent strong share price rally) for drilling exposure.

Catalysts

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

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 Jul 2013