Perisai Petroleum Teknologi Bhd
(Nov 6, RM0.91)
Downgrade to hold with target price (TP) of RM1.05: Perisai Petroleum Teknologi Bhd’s (Perisai) first nine months of financial year 2014 (9MFY14) net profit of RM0.2 million came in below expectations, accounting for only 0.6% of our and consensus full-year estimates.

The disappointing earnings were mainly attributable to start-up costs which we estimate at RM10 million to RM15 million incurred to set up its first jack-up drilling rig, PP101. Perisai’s interest expense was also higher year-on-year as it drew down S$125 million (RM322.9 million) from its medium-term note programme recently ahead of a payment for its second jack-up drilling rig.

Our channel checks suggest that it is unlikely for Perisai to charter out its mobile offshore production unit (MOPU) in the next three to six months. We understand that the Block PM9 production sharing contract may not necessarily be awarded to Talisman Energy Inc (Canada), which is Perisai’s partner as industry sources say. There is still hope for a charter as Petroliam Nasional Bhd (Petronas) had recently rolled out Pan-Malaysia transportation and installation contracts with most work orders beginning late in the second quarter (2Q). This will provide Perisai opportunities to charter out its E3 unit to perform pipe-laying works (likely short-term contracts).

We believe Perisai would likely secure its second drilling rig contract as Petronas is still keen to replace foreign drilling rigs with locally-owned ones. On daily charter rates (DCR) for drilling rigs, our channel checks suggest Perisai could charter out its assets for US$140,000 to US$150,000 in the best-case scenario. In the worst-case scenario, DCR could go as low as US$130,000 to US$140,000, prolonging its payback period to eight to nine years.

We do not discount the possibility of Perisai raising more funds next year via equities, to fund the purchase of its second and third jack-up drilling rigs (capital expenditure at RM1.1 billion).

We lower our estimates for the number of days of utilisation for Perisai’s derrick lay barge (DLB) and MOPU.

Hence we lower our 2015 earnings forecast by 16.2% but retain our 2016 earnings forecast. We also slashed our 2014 earnings forecast by 59.4% to reflect the weak 3QFY14 earnings. We advocate investors to accumulate the shares below 90 sen as we still believe that there is an upside to our TP if Perisai is able to realise its full earnings potential once it secures a new contract for its MOPU, DLB and second and third jack-up drilling rigs.  — UOB Kay Hian, Nov 6

This article first appeared in The Edge Financial Daily, on November 7, 2014.