Reservoir Link Energy Bhd (RL) is one of my favourite stocks in the Oil and Gas (O&G) sector on the KLSE. RL is the provider of well services for O&G Operators that support upstream segments of the industry. Apart from its core perforation service, RL also provides well leak repair, well testing, wireline services and consultancy services.
RL was incorporated in 2009 and has 12 years of experience in the niche segment of providing well perforation services. The company was listed recently in July 2020 on the ACE Market. The IPO received an oversubscription of 11.5 times and was offered at RM0.41 per share.
While there has been several reports covered on RL’s O&G business, this article will emphasize on RL’s recent foray into the solar and renewable energy business. In April 2021, RL made a 51% acquisition of Founder Energy Sdn Bhd for RM21.16 million. The acquisition will be funded via a cash consideration of RM8.46 million and the issuance of 18.15 million new shares at RM0.70 to Mr Lee Seng Chi, the owner of Solar Bina Sdn Bhd.
POINTS OF INTEREST
1) PURCHASE OF FOUNDER ENERGY SDN BHD (FESB)
FESB is a special purpose vehicle that was incorporated to facilitate the transfer of the identified business and assets from Solar Bina Sdn Bhd (Mr Lee Seng Chi’s company) into the new entity.
Solar Bina Sdn Bhd was incorporated on 8 May 2015. It is involved primarily in the supply of solar mounting system and provision of services for the installation of solar mounting system. Since its incorporation, Solar Bina has successfully completed 50MW of solar rooftop projects and 250MW of LSSPV projects.
The acquisition also has the comfort of a RM13.8 million profit guarantee from Mr. Lee over the next 2 years. With regard to the price paid for FESB of RM21 million, it is deemed very attractive as it values the acquistion at only 6 times PE (based on RM3.528 million being 51% of the annualised Profit Guarantee). This is a very compelling valuation when compared to the likes of Solarvest Holdings Bhd (PE of 51.9 times), Samaiden Group Bhd (PE ratio of 44.2 times) and Pekat Group Bhd (PE ratio of 15.2 times)
The structure of the acquisition also has a good safety element for RL since only 30% of new shares will be issued to Mr. Lee Seng Chi once the acquisition is completed, and the remaining shares will only be issued once FESB meets its profit guarantee as per the agreement.
2) IMPRESSIVE LATEST QUARTER RESULTS
The recent quarter showed an astounding 9 fold quarter-on-quarter profit jump from RM630k to RM5.8 million. Turnover was at a new record of RM38.2 million. The very strong showing already reflects the maiden contribution of the new solar renewable energy business.
RL currently trades at a undemanding trailing PE of only 9 times and also has a net cash balance sheet of RM25 million.
3) TRANSFER TO MAIN BOARD OF KLSE
RL has submitted the application to transfer its listing to the Main Board of the KLSE on 28 Sept 2021. If all goes well, the transfer could take place around March 2022. RL was able to apply for the transfer as it has managed to achieve an accumulated profit of RM25.4 million for 3 consecutive financial years. A transfer to the Main Board could further endorses RL’s reputation and investibility in the eyes of the investment community.
3) COMPANY INSIDERS BUYING
The Executive Director of the company Mr. Thien Chiet Chai recently bought 100k shares at RM0.474 on 30 Nov 2021 after being a net seller of shares earlier in the year at much higher prices. Mr Lee Seng Chi (the owner of Solar Bina) also followed suit by buying 300k shares recently at RM0.475 on 2 Dec 2021.
This is a good signal that a floor price could be set at RM0.475 since the insiders see good value at this level.
RL has shown a wide price range from a low of RM0.29 on 5 October 2020 to a high of RM0.83 on 13 April 2021. The highs hit in April 2021 was attributed to the positive response to the FESB news. The lows recorded in Oct 2020 was probably due the bearish sentiment in oil prices. (WTI crude was trading at USD35.00 per barrel then vs USD71.00 per barrel today)
It is in a classic symmetrical triangle pattern with the lower boundary sitting at RM0.47 and upper boundary at RM0.58. For the price structure to turn really bullish we would need a clean break above RM0.58 (which is also the resistance-turned-pivot point). After which, I would be looking at RM0.66 and then a test of RM0.83.
RL is a breath of fresh air given the recent controversy surrounding some O&G stocks. With no legacy issues plaguing them, I am optimistic that the strong and focussed management team at RL can continue to deliver the goods.
With the attractive valuations of the the new acquistion in FESB and consistent growth in its core upstream O&G well services, I believe RL will be a stock to watch in 2022!
Disclaimer: This blog is created for sharing of trading ideas only. It is not in any way or form meant to be an inducement or recommendation to buy or sell any stocks. Consult your financial consultant before making any financial investments.