News  Yesterday, Perdana Petroleum (PERDANA) announced that it entered into a Memorandum of Agreement (MoA) to dispose of one offshore support vessel (OSV) to Hauston Limited for a total consideration of USD28.5m (RM93.5m).

 The expected completion time for the transaction is before end Nov-14.

 USD1.0m would be paid as deposit and the balance of USD27.5m shall be paid within five banking days before the scheduled closing meeting or not later than one banking day after delivery of the vessel.

Comments  We were surprised by the sale as we have assumed that PERDANA would hold on to any workbarges as such vessels are in high demand. This vessel is likely to be the Petra Superior; a 300-men workbarge that is currently still chartered out until Nov-14.

 We suspect the sale is to make way for more vessels. Recall, in Jun-14 PERDANA ordered two 500-men accommodation work barges for a cumulative price-tag of USD84m. There was a further option for two more units and assuming similar costs; the sale consideration of USD28.5m would cover the 20% upfront deposit (c.USD16.8m) for the new vessels. The alternative funds application would be to pare down its borrowings (which at 2Q14 stood at RM594.4m)

 In any case; we believe this is a signal that the company is taking necessary short-term pains to enhance its longer-term prospects.

Outlook  Improvement in earnings from 2Q14 onwards is expected as it features full-quarter contribution of vessels chartered to DAYANG. PERDANA awaits another vessel delivery in 4Q14 which we understand is targeted for Chemical Enhanced Oil Recovery (CEOR) work.

 Medium-to-longer-term prospect is stable on the back of PERDANA’s long-term contracts (14 OSVs). Currently, only two vessels (two 5k BHP AHTSs) are on spot charters.

 Longer-term outlook will hinge on demand for PERDANA’s 500-men workbarges that will be delivered in 1-2Q16, which should enjoy strong demand.

Forecast  We are tweaking our FY15 forecasts down by 7.9% to RM106.7m as we had already forecasted contract renewal for the vessel at RM75k/day.

 We have not imputed any cost savings pending management’s confirmation on the rationale of the sale.

Rating Maintain OUTPERFORM

Valuation  Our target price is thus reduced to RM2.13 (from RM2.31 previously) based on an unchanged target PER of 14.5x.

 We are inclined to cut our sector PERs further (we did one round of PER trims during the 4Q14 Oil and Gas Sector roundup in Oct) pending reconfirmation of macro contract flows outlook for 1H15 which we suspect could still be sluggish.

 Nevertheless, PERDANA will remain our favourite within the OSV space given the long-term nature of its contracts and its fleet-mix that is skewed towards brownfield activities; which should be relatively unscathed by crude oil price downtrends.

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