PERISAI’s 1H16 results were disappointing as 2Q16 results turned into the red after an unexpected discount given on its FPSO Perisai Kamelia. This led us to slash our FY16/17E earnings by 44%/48%. Following the earnings cut, we also downgraded the stock to UNDERPERFORM with lower TP of RM0.16 pegged to lower P/BV of 0.3x due to its high financial risk evident by its high gearing of 1.9x as well as maturing MTNs by October this year.

1H16 below expectation. PERISAI recorded core net profit of RM5.9m in 1H16 which came below expectations, accounting for 37%/29% of house/street’s FY16 full-year estimate. Our core net profit estimate is arrived after stripping off unrealised forex loss of RM12.0m but including net loss of RM5.8m from discontinued operations. The negative deviation is largely due to weaker than expected contribution from FPSO, Perisai Kamelia resulting from discount given on charter rate in 2Q16. No dividend was declared as expected.

Slid into the red. Sequentially, PERISAI recorded core net loss of RM0.8m in 2Q16 from core net profit of RM6.7m in the previous quarter, no thanks to unexpected discount given on charter rate of FPSO, Perisai Kamelia to Hess, which is dependent on crude oil prices (-83.2% QoQ). On a YoY basis, 2Q16 core net losses narrowed from RM1.4m in 2Q15 largely due to better cost efficiency and depreciation savings arising from classification of its MOPU into “asset held for sale” but was largely dragged by 83% weaker YoY contribution from its JV and associate. Cumulatively, PERISAI managed to record 36.4% stronger core net profit of RM5.9m from RM4.3m as a result of similar reasons as mentioned above as well.

Interest cover ratio not fulfilled. In 2Q16, all the financial covenants were complied with except for interest cover ratio and PERISAI is focusing on its cost management to address the slight deviation. Meanwhile, PERISAI had commenced discussions and engage with the holders of the SGD125.0m Medium Term Notes (MTN) maturing on 3 October 2016. In our view, the less than 1.5 months duration could be relatively tight for proper debt restructuring and a request to defer repayment is needed for PERISAI.

Slashed earnings. We lower FY16/17E earnings by 44%/48% to RM9.0m/RM10.5m accounting for lower contribution from Perisai Kamelia as a result of lower charter rate in view of flattish oil prices outlook.

Downgrade to UNDERPERFORM call. Post earnings adjustment, our new price target is lowered to RM0.16 (from RM0.26), pegged to lower 0.3x P/BV (from 0.35x) due to higher financial risk given its high net gearing of 1.9x and accounting for higher share base to account for unconverted call options.

Risks: Inability to secure new contracts for its Jack-up rig, (ii) inability to renew its FPSO contract or redeploy to other fields.

Source: Kenanga Research - 25 Aug 2016