We upgrade Perisai to NEUTRAL (from Sell), as we believe the market has priced in the current lacklustre environment for jack-up rigs in the region as well as issues concerning its idle assets. We raise our TP to MYR0.61 (from MYR0.51, 5% upside) based on a 40% discount to BV/share, as we believe the worst is over and the uptrend in crude oil prices will translate into better prospects for the company.

• Update on drilling rigs. Perisai Petroleum Teknologi’s (Perisai) first jack-up rig, Perisai Pacific 101 (PP101), has just completed drilling at offshore West Malaysia and will be moved to offshore East Malaysia in the near future. PP101 was delivered in Jul 2014 and started work for Petronas in Aug 2014. Two new jack-up rigs, Perisai Pacific 102 (PP102) and Perisai Pacific 103 (PP103), are still on track to be completed in mid-2015 and mid-2016 respectively. Perisai also guided that, if it does not manage to obtain a contract for PP102, it has an option to delay taking delivery of the rig, which may cost paying rental yard space.Management guided that it is actively bidding for contracts in ASEAN.
• Tendering for MOPU. Perisai is currently tendering for contracts for its currently idle mobile offshore production unit (MOPU) Rubicone. We understand that it has not been employed as several projects that it hadtendered for are now delayed. Perisai is eyeing for a long-term contract for the MOPU as it has to be field customised. It is hopeful for Rubiconeto be employed in 2H15, which will provide earnings upside as we have not factored in any contract wins for this unit.
• Key risks. These include lower charter rates for its jack-up rig and offshore support vessels (OSVs).
• Upgrade to NEUTRAL, MYR0.61 TP (from MYR0.51). We keep our earnings forecast for Perisai unchanged at this point. Although there are concerns on its idle assets and the viability of its yet to be delivered jackup rig garnering a contract, we believe that these have been priced in. We raise our TP to MYR0.61 – based on a 40% discount (from 50%) to FY15F BV/share of MYR1.01 – as we believe the worst is over for Perisai and that the upward trend in crude oil prices will eventually translate into better prospects for the company. Hence, we are upgrading our recommendation to NEUTRAL (from Sell).

Enterprise 3. Perisai’s derrick lay barge (DLB) Enterprise 3 is currently unemployed at Malaysia Marine and Heavy Engineering’s (MMHE MK, SELL, TP: MYR1.22) yard in Pasir Gudang, Johor. Perisai is currently bidding for both long-term and short-term contracts for the DLB. However, there are currently more spot charter contracts in the market. Management also guided that it will be exercising its put option on Enterprise 3 at the end of 2016.

Perisai Kamelia and OSVs. Perisai owns 51% of the floating, production, storage and offloading (FPSO) vessel Perisai Kamelia, which is currently chartered to Hess Exploration & Production BV. The FPSO is currently in its second year of its firm contract that will last until 2016 with an option for another 3-year annual extension. Perisai also owns a 51% stake in nine OSVs, which are currently on bareboat charter to Ezra Offshore (EZRA SP, BUY, TP: SGD0.55).

PP102. Perisai has paid a 20% down-payment for PP102 and will only pay the remaining balance once it has taken delivery of the vessel. At this point, we believe that there is a possibility of Perisai deferring the delivery of the jack-up rig. Management guided that the company is currently bidding for 5-6 contracts in ASEAN, with a preference for long-term contract of 1-2 years.

Earnings unchanged. We keep our earnings forecast for Perisai unchanged at this point. Although there are concerns on its idle assets and the viability of its yet to be delivered jack-up rig garnering a contract, we believe the market has factored in all the risks. We believe that crude oil prices have bottomed and will gradually recover to average USD72.50/barrel (bbl) in 2015. We raise our TP to MYR0.61 (from MYR0.51) – based on a 40% discount (from 50%) to FY15F BV/share of MYR1.01 –as we believe the worst is over for Perisai and that the upward trend in crude oil prices will eventually translate into better prospects for Perisai. Hence, we are upgrading our recommendation to NEUTRAL (from Sell).

Risk. Downward revision in charter rates for its jack-up rig and OSVs will see Perisai registering lower earnings.