News

Perdana announced that it will terminate the bareboat charter arrangement with Mount Bintang and Mount Bubu on three vessels – Perdana Liberty, Perdana Frontier and Perdana Horizon and in the same time had entered into MOA to purchase the 3 vessels above for approximately US$50m.

The termination and purchase will result in the recognition of the vessels as assets of Perdana and hence converting the vessels that are foreign flag to Malaysian flag.

Comment

We view the acquisition positively as i) it will convert the vessels that are foreign flag to Malaysian flag which will benefit from Petronas’s favourable policy toward local player and ii) saving in terms of lease rental expense.

The vessels purchase comprise of 2 AHTS (charter on spot rate) and 1 workboat. The acquisition is expected to result in savings in terms of lease rental expense against interest and depreciation cost of about RM10m per annum. We estimated the acquisition will be funded by 70% bank borrowing and 30% by internal generated funds. Balance sheet remains manageable and gearing ratio will increase from 0.7x to 0.9x.

We deem this as a right strategy and inline with our expectations of higher utilisation rates steaming from a cyclical upturn in the OSV market based on increase in offshore O&G work which in turn flows from Petronas’ 5 year RM300bn CAPEX investment as the Government tries to resuscitated domestic O&G production.

Recall that Perdana has entered into MOA to purchase 3 new workbarges which are expected to take deliveries by 2014 with 2 of the vessels working for Dayang HUCC’s jobs. We understand that the Shell HUCC job might require more workbarges, which might benefit Perdana. Channel checks with drilling rig crew indicate that each drilling rig requires 3 OSVs to run smoothly and securing these OSVs is becoming difficult. We are still positive on the stock in view of additional catalysts of: capacity expansion, higher utilisation from the HUCC contracts; M&A or even privatisation; and winning a marginal field.

Risks

• Global recession hitting O&G price
• Business and restructuring execution failure
• Increase in OSV supply

Forecasts

We raised our FY14 and FY15 earnings by 12% and 10% respectively after factored in the cost saving from the acquisition deal.

Rating

BUY

Positives –

• Demand drivers improving.
• OSV supply relatively inelastic.

Negatives –

• Increased competition for growth markets.

Valuation

Maintain BUY call with TP raised from RM2.38 to RM 2.69 pegged at an unchanged 14x FY14 EPS of 19 sen/share based on our small cap O&G multiple.

Source: Hong Leong Investment Bank Research - 25 Nov 2013