Results

In line: 2QFY14 result return to profit but 1HFY14 remains in the loss mainly due to losses from MOPU and E3 as both vessels had completed charter in 3Q13.

Deviations

Expect 2H to register profit due to contribution from jack up rig contract.

Highlights

1HFY14 result fell into red but is within expectation mainly due to the contract expiration on MOPU and E3 in Sep 13. Currently, both vessels remained idle with estimated burn rate of RM4m per month. We understand from management that the downtime for both vessels is likely to extend to end of FY14. To note, previously, we have assumed only 3 month contribution for MOPU and 6 months from E-3 in FY14. Hence, our new FY14 earnings will be lower as now we assume no contribution from both vessels in FY14.

On the more positive side, its first jack up rig is expected to contribute from Aug 14 onwards with US$22m revenue to be recognised in FY14. This will help to mitigate the weakness from MOPU and E3. To recap, Perisai has secured US$158m contract for its first drilling rig. It will add its second and third rigs in 2Q15 and 3Q16.

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.

Perisai is a cheaper proxy to drilling related stocks. Currently, Perisai is trading at 12x CY15 P/E vs. UMW Oil and Gas at 20x CY15 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.

We advise long term investors to look beyond FY14 with better earnings to filter through in FY15. FY16 P/E expects to fall to 8x after the third jack up rig starts to operate in 4QFY16.

Risks

Delay in contract award for MOPU and execution risk.

Forecasts

FY14 earnings reduced by 55% as we now assume no revenue contribution from MOPU and E-3 versus previous assumption of 3 month contribution for MOPU and 6 months from E-3. FY15 earnings cut by 8% as we factored in lower margin for MOPU.

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 TP reduced from RM1.87 to RM1.72 (based on unchanged 14x FY/15 EPS of 12.3 sen/share) post earnings downgrade.

Source: Hong Leong Investment Bank Research - 14 Aug 2014