We believe a restructuring of its MTN debt is needed to address stretched cash flows and a successful disposal of idling assets will be a plus point to the current situation. Rate reduction risk persists especially for its OSVs and FPSO amidst sector-wide slowdown. No changes to our forecasts. All in, we maintain our MARKET PERFORM call with an unchanged TP of RM0.26 pegged to CY17 P/BV of 0.35x.

Discontinued MOPU for sale. In 1Q16, management had the intention to sell its mobile offshore production unit (MOPU), Rubicone and classified it under "asset held for sale". PERISAI is currently in talks with potential buyers and we expect the selling price to come under pressure given the current weak market condition. However, should PERISAI secure any contract for the MOPU, it would be re-classified back to non-current asset and depreciation charged accordingly.

Continue to delay rig delivery amid rate cut pressure. Delivery date for its second jack-up rig was due in March and PERISAI is trying to defer the delivery until a contract is secured. Recall that PERISAI recently announced a delay for the delivery date of third jack-up rig, Perisai Pacific 103 to 30 Oct 2016 from 31 July 2016. Meanwhile, in our view, PERISAI could possibly face rate reduction risk from their clients for its OSV’s longterm contracts as well as its FPSO. Note that PERISAI is in the midst of negotiating its FPSO extension contract.

In need of debt restructuring. As of 1Q16, PERISAI’s short-term borrowings of RM460.7m included the unsecured MTN amounting to RM359.1m (equivalent to SGD125.0m) due in October this year. Based on the 1Q16 financial statements, we reckon the operating cash flow is only sufficient to pay off RM47.6m in term loan. Thus, PERISAI needs to either restructure its debt portfolio or defer repayment. Meanwhile, PERISAI is likely to exercise its put option to sell off its 51% stake in SJR Marine, which owns the pipe-laying barge, Enterprise 3 to EOC Ltd for USD43m at the end of the year, hence allowing PERISAI some breather amidst tightening cash flow.

Risk of breaching loan covenants. We are guided that PERISAI met its entire loan covenants attached to the MTN in 1Q16, including criteria on shareholders fund, gross gearing and interest cover. However, going forward, there is a risk of breaching these covenants if the MTN is restructured on the same terms. For instance, gross gearing threshold of 2.5x will be exceeded if the two jack-up rigs were delivered. Furthermore, PERISAI’s interest cover (including FPSO Kamelia’s contribution) may also fall below the 3x threshold if the extension is not granted or extended at substantially lower rates.

Retain MARKET PERFORM call. No changes to our current forecast at this juncture but we continue to be wary of its high net gearing of 1.9x. Target price is maintained at RM0.26 peg to 0.35x P/BV. Thus, we reiterate our MARKET PERFORM call. Downside risks to our call: Inability to secure new contracts for its Jack-up rig and (ii) inability to renew its FPSO contract or redeploy to other fields.

Source: Kenanga Research - 10 Jun 2016