We paid a visit to PERISAI recently to get updates on developments. From the visit, we gathered that it remains no surprise the rig rates are under pressure currently with the sustained oil price slump. Hence, the DCR for premium Jack-ups now ranges at USD100,000-110,000/day as opposed to USD140,000-160,000/day a year ago, thereby making a cut in PEIRSAI’s currently working jack up rig inevitable. As for Enterprise 3, its pipe laying barge, it will most likely be disposed to EOC Ltd for USD40m through exercising its put option, providing more headroom for the group to navigate through the hard times. We have relooked at PERISAI’s valuation post its share price plunge since start of the year and found that its diluted net realisable value per share is at 66.0 sen/share after applying 20% discount on its net asset excluding RM324.5m prepayment, at significant premium to its last traded price. While we do not deny that the company is expected to continue facing multiple headwinds in the medium term, we are of the view that the selling is overdone for the stock and it is worth a second look given its relatively marketable asset base despite the slowdown in the overall O&G market. Upgrade to OUTPERFORM with TP maintained at RM0.59 pegged to unchanged 0.5x CY16 PBV.

Rig rate under pressure, as expected. Amid the oil price slump, the rig market is one of the first business segments to be hit due to its large exposure to the exploration phase of the oilfield cycle. Based on our discussion with the management, we understand that the group is under on-going discussion with Petronas to renegotiate the charter rate under its multiyear charter contract for Perisai Pacific 101, its only Jack-up rig in operations. To recap, it has secured a USD158m charter contract from Petronas Carigali in May 2014 with implied DCR of USD144,292/day. Based on the last count in Baker Hughes data, there are only 8 rigs active in Malaysia in June this year, as opposed to 15-16 in some months last year. We believe a discount on charter rates is imminent and by benchmarking it to the estimated market rate (USD110,000), we believe a 20% cut in rates is possible and stay for another 1- 2 years. Notwithstanding, we believe that the rig will still be profitable and cash flow positive.

Not all doom and gloom. While multiple headwinds are expected to continue bogging down its earnings in the next 2 years, there is still a ray of hope for the group. Recall that on 3rd June 2013, the group has proposed to dispose its 49% stake in SJR Marine, which owns its pipe-laying barge, Enterprise 3 to EOC Ltd. On top of that, the deal also comes with a put option for PERISAI to sell off its remaining stake to EOC Ltd for a consideration of c.USD40m by end 2016. This might provide cash flow infusion for the group while interest savings could be realised if it were to be used to repay borrowings while partial earnings pressure would be removed from the group. Enterprise 3 has been without a charter thereby putting a strain on the group’s cash flows. However, the pipe laying business segment was never a focus of the group since they announced the deal as it has expressed its interest to expand its drilling and production businesses.

What is the potential floor value? PERISAI’s share price has plunged 18.7% YTD due to its underperforming production and pipe laying assets and high gearing amid uncertain times in the O&G market. Therefore, we did an analysis on its balance sheet to compute the floor value of the company under the worst case scenario assumption, which is the potential break-up value of the company assuming orderly liquidation. The fully-diluted net realisable value per share stands at 82.0 sen excluding its prepayment (consisting of down payments for upcoming jack-up rigs) and intangibles. Even after applying a 20% discount on the adjusted net realisable value assuming a discount of asset prices due to the weak market, the realizable resale value of the net assets value is at 66.0 sen/share, implying a premium of 70.4% on its last traded share price.

Trading at fire sale value. While it’s near term earnings risks are significantly high with problems of incoming debt repayment, we believe the stock is still under-priced given its significantly higher net replacement value of assets. We opine that the stock does not deserve to trade at such a wide discount against its floor value. In addition, it is trading at 0.3x CY16 PBV, which is 2 SD below its 6-year average, unprecedented since Aug 2008. We have decided to maintain our forecast for now pending its result release later this month despite possible further cuts in rig rates by Petronas as we seek more clarity of its 2Q15 numbers. We upgrade the stock to an OUTPERFORM from MARKET PERFORM previously based on maintained TP of RM0.59 (54.2% potential upside) pegged to 0.5x FY16 PBV, which is close to -2 SD to its 6 year average. While near term positive catalysts are not in sight, we believe the selling of the stock is overdone and its assets have higher intrinsic value than implied by the market.

Weaker cashflow generation. Based on the 2014 annual report, the group has RM135.1m worth of term loans payable in 2 years’ time, implying debt repayment of RM67.5m p.a. Our model suggests that the operating cash flow is estimated at RM45.9m p.a. based on the current oil price scenario, insufficient for the group to service its debts from operational cash flow alone. However, bear in mind that the group still possesses the Medium Term Note (MTN) facility programme which allows issuance of up to SGD700m MTN. To-date, the group has only utilised SGD125m of the facility, leaving further room for financing to bridge any cash flow gaps during uncertain times and it is likely that it will refinance some of its term loans upon expiry in the next 2 years to maintain its liquidity.

Deliveries of rigs likely to be delayed. Its 2nd Jack-up unit, Perisai Pacific 102, was originally scheduled to be delivered Aug this year, but the group has decided to delay the delivery in the absence of a charter contract. Currently, the rig is at Semcorp Marine’s fabrication yard with 99% completion rate. We opine that the delivery will be extended for at least 6 months to give PERISAI more breathing space in its quest to search for a decent rig charter contract. Peg to the similar Perisai 101, the burn rate of Perisai 102 could amount to RM50-60m inclusive of depreciation and interest costs if it were to take delivery of the asset, which will put a large dent on the company’s profitability if no charter contract is secured. We believe the rig delivery will be extended further as long as charter contract is not secured for the asset until the market recovers, preventing further dent to its profitability.

Production assets brief. Its 51%-owned FPSO, Perisai Kamelia, is currently contracted to Hess on a 3-year firm contract operating at Kamelia Field in the North Malay Basin area. It is expected to run until Nov 16 with a 1-year extension option available. Its MOPU, Rubicone, continue to be a strain on its earnings due to the absence of charter contracts. We do not expect the asset to turn into the black anytime this year due to the challenging oil price environment rendering marginal field projects (which are the main demand driver for the asset due to its nimble asset size) to be delayed. In addition to that, the redeployment of asset to the oilfield will take a while as usually production solutions are customized to the requirements of the field. Therefore, we believe more work would be done by the group to gain a foothold on the global production business. 

Source: Kenanga Research - 10 Aug 2015