We upgrade PETR to BUY (from Neutral), as its FY14 story is centred on its:  i)  earnings  turnaround  since  FY12,  ii)  high  ~85%  utilisation  rates, and  iii)  continuous  excitement  in  the  offshore  supply  vessel  (OSV) segment.  Following  our  FY14/15  earnings  upward  adjustment  by 19%/16%,  and ascribing a higher FY14F P/E of 17x  (from 15x), PETR’s ex-bonus, fully diluted FV is now MYR1.80 (from MYR1.82).

• Possessing  a  young  and  powerful  fleet.  PETR’s  current  fleet  of anchor  handling  tug  supply  (AHTS)  vessels  is  younger  and  possesses higher  brake  horsepower  (BHP)  relative  to  the  average  statistics  of AHTS  operating  in  the  region.  Moreover,  day  rates  have  been  on  a general  uptrend  since  CY10,  notably  for  large-sized  AHTS  (ie >10,000BHP). This works out well for PETR to garner favourable charter rates, given at least  six  out of its eight  AHTS vessels are of that  calibre. On  the  other  hand,  its  two  smaller-sized  AHTS  vessels  (at  5,220BHP) are  on  spot charters.  These vessels  experience  heavy  competition,  as the supply of this class are much higher than that of their larger brethren. Including workboats and barges, PETR’s total fleet of 17 vessels  have an average age <4 years.
• OSV  market  demand  remains  in  the  picture.  We  believe  the  local OSV  market  will  continue  to  see  excitement  throughout  FY14-15, supported by leading indicators such as i) Petronas’  offshore capex, ii) charterers’ increasing demand  for younger and  environmentally-friendly OSVs,  and  iii)  potential  corporate  exercises  and  IPOs  amongst heavyweight  OSV  candidates  (ie  Icon  Offshore,  Syarikat  Borcos Shipping SB). These factors should support PETR’s share price.
• Upgrade  to  BUY,  fully  diluted  FV  at  MYR1.80  (from  MYR1.82).  We upgrade PETR’s FY14/15 earnings by 19%/16%, following cost savings (with reference to PETR’s announced acquisition of  three vessels in Nov 2013) and tax rate assumptions halved to 7%. Our core assumptions are high  charter rates at USD1.80-2/BHP, and utilisation rate maintained  at 85%. Similar to last year, we expect  four  vessels  to undergo docking for sea-worthiness inspection in FY14. However, we ascribe a higher P/E at 17x  at +1SD  (from 15x). W e believe  PETR’s  share price upside (+14%) will be premised on its earnings turnaround and the positive OSV market sentiment. Expect two more work barges to be delivered in 1Q and 3Q of FY14 respectively.

• Note that competition amongst the smallsized AHTS vessels class is more intense
• We are comforted that most of PETR’s vessels are on long-term charters. We expect about five work barges and a workboat to be deployed to its major shareholder, Dayang Enterprise, for the Pan Malaysia contracts. This provides earnings visibility for the next five years.

Our FV of MYR1.80 is pegged to a higher P/E of  17x, close to its +1SD since 2012.  This  is  premised  on  the  company’s  earnings  turnaround  and  the  positive sentiment in the OSV market. Recall that the company made core losses in FY10-11, a period plagued by the bottoming of charter rates, lower utilisation and high impairment  losses  on  aged  vessels.  Our  FV  is  fully  diluted  for  its  2-for-5  bonus issue and warrants, implying a fully diluted share capital of 779m shares.

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SWOT Analysis

Company Profile
Perdana Petroleum (PETR) provides offshore marine and integrated brownfield services for the upstream oil & gas industry

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Source: RHB