News  Perdana Petroleum Bhd (PERDANA) announced that it had entered in a mutual agreement with Mount Bintang LLC (Mount Bintang) and Mount Bubu LLC (Mount Bubu) to terminate the bareboat charter arrangement on three vessels, namely (i) “Perdana Liberty”, (ii) “Perdana Frontier”, and (iii) “Perdana Horizon”.

 Concurrently, PERDANA had entered into a MoU with Mount Bintang and Mount Bubu to purchase the vessels for c.USD50.0m (RM155m).

 We understand that the purchase of these vessels will be funded by internally generated funds and bank borrowings. PERDANA has secured re-financing facilities of c.USD34.0m (RM105.4m) to part finance the purchase of the vessels.

Comments  According to PERDANA, the purchase will result in lease rental savings against interest cost and depreciation of about RM10.0m p.a.. It also guides that gearing ratio will increase to 0.9x from 0.7x currently.

 We believe PERDANA is buying back the vessels as it is bullish on the longer-term outlook for the vessels, hence it is seeking full ownership of the vessels. It also intends to reflag these vessels to the Malaysian flag, which we believe will enhance future job prospects' rates given the local market’s preference for local flagged vessels.

 Gearing is likely to be higher than 0.9x in FY14 as PERDANA continues to receive its vessels, but we believe this should be viewed holistically as firmer contract prospects mean such debt is backed by cash inflows.

Outlook  Medium-to-long-term prospects are stable on the back of PERDANA’s long-term contracts. For its existing vessels, at least 10 are chartered till 2018-2019 and another three are till 2014-2015. Only four vessels (one accommodation barge and three AHTSs) are on spot charters which PERDANA is confident of securing recurring contracts.

 Longer-term prospects will hinge on PERDANA’s future fleet expansion which we believe management will broach after it mobilises all vessels needed for the DAYANG project by next year.

Forecast  We have revised our EBIT forecasts by RM10m to account for the lease payment savings; but increased our interest costs by 23.7% to RM32m (from RM29.5m) to account for the addition interest from increased borrowings as we were previously too conservative on that front. All in all, these revisions resulted in our FY14 net profit forecasts increasing by 4.1% to RM88.3m (from RM84.8m).

Rating Maintain OUTPERFORM

Valuation  Our net profit forecast revisions nudge our target price to RM2.50 (previously RM2.40) based on an unchanged target PER of 14.0x (in line with its 2-year historical average forward PER of 14.0x seen in 2007-2008) on its CY14 EPS of 14.6sen.

Risks to Our Call (i) Lower than expected daily charter rates and utilisation rates and (ii) sudden downturn in crude oil prices that could adversely impact the offshore oil and gas services industry.

Source: Kenanga