The first set of FY16 quarter results was above expectations due to depreciation savings from MOPU being classified as "asset held for sale". We are increasing our earnings forecast for FY16E/FY17E to adjust for the depreciation savings as well as lower finance cost. Nevertheless, PERISAI’s high net gearing position at 1.9x is worrying given its short-term borrowings of RM460m as of 1Q16. Despite earnings upgrade, we maintain our MARKET PERFORM call with lower TP of RM0.26 after rolling forward valuation base year to CY17, pegged to lower P/BV of 0.35x due to its high financial risk.

1Q16 above expectation. PERISAI recorded strong core net profit of RM6.5m in 1Q16 which came above our expectation, accounting for 57%/31% of house/street’s FY16 full-year estimate. Our core net profit estimate is arrived after stripping off unrealised forex loss of RM10.7m but including net loss of RM6.4m from discontinued operations. Note that management has decided to sell its mobile offshore production unit (MOPU), Rubicone and classified it under "asset held for sale". We believe the large deviation was due to lower depreciation charges on MOPU. No dividend was declared as expected.

Depreciation savings. Despite revenue sliding 3% YoY due to discount given on its Jack-up rig, 1Q16 core net profit surged 18% to RM6.7m due to cost savings from one-month depreciation charges from Rubicone, estimated at RM2m/month as well as strengthening of USD against MYR. Sequentially, 1Q16 net profit increased by 24% largely due to depreciation savings as mentioned above and stronger JV earnings (+23% QoQ) underpinned by better cost management.

No further asset delivery unless new contracts in hand. Recall that PERIAI recently announced a delay in the delivery date of third jack-up rig, Perisai Pacific 103 to 30 Oct 2016 from 31 July 2016. The company is currently renegotiating to defer the second jack-up rig which was due in March.

Earnings upgrade... We adjusted FY16E earnings upwards by 37%/113% to RM16.0m/RM20.4m accounting for: (i) depreciation savings on MOPU while it is being classified under "asset held for sale", and (ii) lower finance cost as a result of trimming our capex assumption and borrowings but partially offset by 10% reduction in DCR of its jackup rig in view of further rate-renegotiations by clients.

... but keeping MARKET PERFORM call. Post earnings adjustment and rolling over of valuation base-year to CY17 from CY16, our new price target is lower to RM0.26 (from RM0.29) peg to lower 0.35x P/BV (from 0.4x) due to higher financial risk given its high net gearing of 1.9x. We believe the management will need to restructure its borrowings, especially on its short-term borrowings of RM460m, which is equivalent to more than half of its equity value. Thus, we reiterate our MARKET PERFORM call. Downside risks to our call: Inability to secure new contracts for its Jackup rig, (ii) inability to renew its FPSO contract or redeploy for other fields. 

Source: Kenanga Research - 20 May 2016