News  PERISAI announced on Tuesday that it had entered into a Rig Construction Contract with PPL Shipyard Pte Ltd to construct a third jack-up rig at a price of USD211.5m (c.RM653.5m). The contract price includes certain enhancements that had been undertaken over the Perisai Pacific 101 and Perisai Pacific 102.

 The contract price is payable in two portions with the initial 20% payable upfront and the balance 80% upon delivery (expected to be by 3Q16).

Comments  We are positive on the third jack-up rig ordered as this gives Perisai further exposure in the drilling rig sector which is in the uptrend cycle. Post the acquisition of this rig, Perisai will own 3 jack-up rigs.

 Looking at the company’s balance sheet, we believe it will not have any issues with the 20% payment upfront, but we will not be surprised if the company to look for additional equity funding moving ahead. Having said that, the delivery of the jack-up rig is only in 2016.

Outlook  According to management, E3 is tendering for the Pan Malaysia T&I job and other prospects; whilst the MOPU Rubicone is also looking for projects on both local and domestic shores. In terms of timeline, the E3 could possibly see a contract within the year (assuming it gets the Pan Malaysian T&I job); whilst any MOPU contract would likely be next year.

 The FPSO is likely to see some contributions in 4Q13. PERISAI is set to receive two jack-up rigs (in mid-14 and mid-15) which we believe should be able to secure contracts given that there are at least 17 rig contracts that are expiring from mid-2013 to 2015.

Forecast  No change to our earnings estimates given that the earnings accretion from the new rig will only be in 2016.

Rating Maintain MARKET PERFORM

Valuation  We have increased our target PER to16x (from 14x previously) as we believe the continual PER expansion of industry heavy-weight, i.e. UMW O&G, could spur a re-rating for smaller-cap peers like PERISAI. As such our TP is raised to RM1.63 (from RM1.42).

 For PERISAI, the 16x PER is still approximately a 15%-discount to its 5-year +1.5 standard deviation (above its Forward PER mean) of 18.7x.

 We believe this is justifiable as the stock is still relatively a small-cap and there could still be uncertainties with regards to job wins for its MOPU division.

Risks  Contracts for E3 and MOPU Rubicone coming in faster than anticipated.

Source: Kenanga