We keep our MARKET PERFORM rating on PERISAI unchanged as the latest 6-month FPSO charter extension and 12-month monthly renewable option beyond that does not improve its earnings visibility significantly. Furthermore, it will only have about 1.5 month to negotiate with its MTN holders to defer debt repayment. No changes to our forecasts and target price of RM0.26 pending 2Q16 results announcement later this Wednesday.

Extension for FPSO Kamelia. Last Friday, PERISAI announced that Hess Exploration and Production Malaysia B.V (Hess) has agreed to extend the charter of the FPSO, Perisai Kamelia for six months to 31 May 2017 and may exercise its option to further extend the charter on a monthly basis for up to a total of 12 months to 31 May 2018. The value of the extension is expected to be in the range of between USD32.0m and USD45.0m, depending on the daily average Brent crude oil prices.

Charter rate pegged to oil prices. To recap, PERISAI’s 51% owned FPSO, Perisai Kamelia has been deployed to the North Malay Basin Early Production System since November 2013 for a firm 3 years with an extension for another 3 years. Due to the uncertain oil price outlook, the client has decided to peg its extension charter rate to oil prices. The implied daily charter rate of USD180k-250k/day, depending on oil prices are 0%- 28% lower than its original charter rate. Furthermore, the 12-month extension commencing from June 2017 is extendable on a monthly basis, giving less earnings visibility to PERISAI as client can terminate or opt to renegotiate the charter rate upon expiry of monthly extension.

Negotiating with MTN holders. Meanwhile, PERISAI also announced that it will commence discussions and engage with the holders of the SGD125.0m Medium Term Notes (MTN) maturing on 3 October 2016. Based on the 1Q16 financial statements, we reckon the operating cash flow is only sufficient to pay off RM47.6m of the term loan. In our view, the one and half month duration could be relatively tight for proper debt restructuring and a request to defer repayment is needed for PERISAI. The put option to sell off its 51% stake in SJR Marine, which owns the pipelaying barge, Enterprise 3 to EOC Ltd for USD43.0m is only exercisable at the end of year.

Risk of breaching loan covenants. PERISAI’s interest cover (including FPSO Kamelia’s contribution) may also fall below the 3x threshold given that rates were renegotiated downward. This could trigger the risk of breaching these covenants if the MTN is restructured on the same terms. Furthermore, gross gearing threshold of 2.5x will be exceeded if the two jack-up rigs were delivered. 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.

Retain MARKET PERFORM call. We are keeping our earnings forecast pending its 2Q16 results announcement this Wednesday. Operationally, asset utilisation remains weak amid rate cut pressure and PERISAI is focusing on better cost management to achieve a better bottom line. Thus, we maintain our MARKET PERFORM call for now with unchanged target price of RM0.26 peg to 0.35x CY17 PBV with potential downside bias. Downside risks to our call are: inability to secure new contracts for its Jackup rig, (ii) inability to renew its FPSO contract or redeploy to other fields, and (iii) inability to restructure its debt portfolio.

Source: Kenanga Research - 22 Aug 2016