Highlights

Graduating from SPAC… Sona announced to acquire a 40% stake in Salamander’s Thai assets, B8/38 (production / development) and G4/50 (exploration concession) for US$281.2m (US$251.2m for B8/38 and US$30m for G4/50). The acquisition is expected to be completed in 4Q14 conditional upon approval from SC, Sona and Salamander’s shareholders.

Immediate cash inflow generation with >10 years production… Bualuang (or B8/38) is Salamander’s flagship production with average of 12,300 bbl/d in 2013 and contain 31MMboe of 2P reserves and 18MMboe of 2C reserves, according to GCA’s estimate. To note, Bualang has underwent 6 reserves upgrades since 2008 from 15MMboe. We expect it to generate > US$300m at EBITDA level (on 100% basis) in 2015 without taking into account the conversion of 2C to 2P reserves.

2P reserves to significant increase by 41% in 4Q14… We understand the company is planning for Phase 4 development which will install a 3rd wellhead platform (“Charlie”) in 4Q14 and this will convert 12.8MM boe to 2P reserves, bringing total 2P reserves to 44MMboe (+41%). The total development capex for 2C Charlie is about US$300m and will be funded by existing cash flow generation without additional fund raising. We estimate production to increase to around 16,000 bbl/day (+30% from 2013) in 2016 and expect to last until 2035 subject to approval extension in 2025.

Further potential upside from exploration asset…G4/50 is an exploration block surrounded by existing producing fields with estimated 76MMboe, according to GCA data. Two exploration wells were planned in 2014 and up to 4 additional wells in 2015. We have not factor in any reserves addition from G4/50 in our forecasts.

Favourable tax regime… In Thailand, besides royalty fees (5-15%), there are petroleum income tax (~50%) and special remuneratory benefit (SRB, 0-75% correlate to annual revenue on cumulative depth of well drilled) to pay to government. Although the figures look high on the surface, SRB rate is charged after deduction of royalty fee, capex, opex and losses carried forward. In a nutshell, for every US$100/bbl, operator in Thailand on average shares US$45/bbl as compare to Malaysia of ~US$25/bbl, nett of all taxes.

Traded at <10x FY15 P/E and 31% significant discount to our fair value of RM0.79 per share…The acquisition is NPV accretive and we estimate the company to trade at attractive <10x FY15P/E. Upcoming approval from SC and shareholders will help to narrow the discount to fair value with immediate catalyst of 2P reserves upgrades in 4Q14. As comparison, Hibiscus share price has increased by 156% since the date of announcement of QA acquisition until shareholder approval.

Risks

• Awaiting SC and shareholder’s approval.
• Unsuccessful exploration.

Valuation

Significantly below SOP…After the completion of Salamander’s Thai asset, we arrive the fair value at RM0.79 per share (~45% potential upside) by using DCF method. We have not capture in exploration cost and potential reserves addition from G4/50 exploration block.

Source:Hong Leong Investment Bank Research - 24 Jul 2014