Highlight

Perisai has fixed the price of its 108.4m placement shares at RM1.53 each, representing 10% of the existing issued and paid up capital. The exercise will raise RM166m, which will be used for partial repayment of bank borrowings and capital investment for jack up rigs. To recap, the company has recently announced the purchase of its third rig from Sembcorp Marine which is expected to be delivered in 3Q16.

The construction of Perisai Pacific 101 is on track to delivery in May. We understand the company is in the midst of negotiating with potential customers and it is likely to be long term contract. We are optimistic that Perisai will secure a drilling contract before the delivery and acts as re-rating catalyst for the stock.

In addition, the result for the bidding for Block PM-9 would be delay to 2Q14 (vs our expectation in 1Q14 previously). Given the partnership with Talisman, Perisai would benefit through providing MOPU, drilling and pipelaying if Talisman wins the bidding. 1Q14 result expects to remain weak as E-3 and MOPU were out of work with estimated burn rate of RM6m per month for both vessels.

Comment

Perisai is the second largest jack up rig providers in Malaysia with total 3 rigs expect to operate in FY16 (vs. UMW O&G 8 rigs). Given the robust drilling outlook with 14 foreign jacks up rigs contract to expire within 1-2 years, Perisai is well position to benefit from it.

Despite the uncertainty on the timing of securing contract for E3 and MOPU, we believe the market has underappreciate potential contributions from the producing and drilling assets (FPSO and Jack Up rigs, collectively to contribute 67% of earnings in FY15), which was masked by the absence of revenue from E3 and MOPU.

We advise long term investors to look beyond FY14 with better earnings to filter through in FY15. FY16 P/E expects to fall to 9x after third jack up rigs starts to operate in 4QFY16.

While it is expected to dispose the E3 in FY15, we are optimistic that the company will secure a contract for MOPU given the demand for this type of asset due to interest in marginal oilfield and increasing rejuvenating activities for existing oilfield.

Perisai is a cheaper proxy to drilling related stocks. Currently, Perisai is trading at 11x CY15 P/E vs. UMW Oil and Gas at 20x CY 15 P/E. We deemed the huge discount to be unjustified and expect the valuation gap between UMW O&G and Perisai to narrow going forward, once Perisai dispose of E3 and secured a contract for MOPU.

Risks

• Political risk. Execution risk.

Forecasts

Unchanged.

Catalysts

• Securing drilling contracts before rig delivery.
• New contracts for E3 and MOPU.
• Expand into E&P segment.

Valuation

We maintained our BUY call with unchanged TP of RM2.06 (based on unchanged 14x FY/15 EPS of 14.7 sen/share).

Source: Hong Leong Investment Bank Research - 7 Apr 2014