Thursday, March 31, 2011

RHB Clarifies Its Statement On Perisai

In the earlier posting, Perisai: Life Is Too Damn Good!, I highlighted the following: In a news flash yesterday morning from the Edge (strange I can't find the url of the article but that article can be viewed here: )

  • RHB Research said on Wednesday, March 30 that this was an unusual transaction which brings the former CEO back into the company, and more so given Perisai had sold Garuda to him in mid-2010 for just US$5 million cash.

    In early-2010, Garuda had acquired a jack-up rig for US$5m cash, which Perisai now appears to be targeting in this acquisition. Other than a change in name (from Hercules 191 to Rubicone) the rig is currently being converted into a MOPU.

    The rig has also been chartered out to Gryphon on a 2+1 year bareboat charter basis for US$25 million per annum.

    “We are concerned about the transaction and the new issue of shares, which will give Nagendran a 13.5% stake at a 20% discount to the current share price of 81 sen.

    “This will dilute current major shareholder Ezra Holdings' 19% stake to 17%. Moreover, we believe there is a corporate governance issue relating to the effective purchase of the asset at 14x premium to the original disposal price of the same asset,” it said.

Apparently, RHB now said they were wrong!

♦ A good deal. After meeting with management yesterday, we realised that all our concerns as highlighted in our RHB Equity 360 report were factually inaccurate and the report has been withdrawn. In fact, the proposal appears to be a good deal for Perisai, given: 1) the availability of the asset coincides with the long-term charter contract; and 2) the bare boat charter of US$25m p.a. for a period of 2+1+1 years is expected to be net cashflow positive to Perisai.

♦ Not the same asset. We note that Perisai’s management took a prudent view in early-2010 and chose not to speculate on the market demand for jack-up rigs at that point, and decided to sell Garuda Energy. Moreover, management clarified that Garuda Energy owned the shell of a used jackup rig at the point of sale in 2010. Today, the asset has been refurbished by the vendor and is undergoing conversion into a Mobile Offshore Production Unit (MOPU).

♦ Arms length transaction. We understand the negotiations were conducted at arms length (and this is not a related party transaction as the vendor had in 2010 sold out of Perisai to Ezra Holdings). Moreover, Perisai will only pay the balance of US$66m purchase price (nett of the US$4m deposit) upon delivery of the MOPU to the charter client as per the specifications of the client and Perisai. Any cost overruns will be fully borne by the vendor. Therefore, we believe there is no corporate governance issue with the proposal, which has been negotiated to the benefit of Perisai shareholders, and is still subject to a due diligence exercise.

♦ Risks. We believe the cyclical risks are inherent in all industry players, but for Perisai, the risk is mitigated by this long-term contract as well as longer-term expectations of jobs in Malaysia’s marginal fields. A reversal in the crude oil price uptrend would however affect the vessel assets that were recently acquired from Ezra. In our view, despite net gearing of 0.7x end-2010, Perisai should have no problem raising funding for the RM150m cash portion of the purchase price given the ready long-term contract.

♦ Potential for upside. Our back-of-the-envelope calculation suggests net profit contribution from the charter to be around RM40-50m, vs. the FY10 reported net profit of RM10.3m and FY11 consensus net profit of RM30m (which excludes the Intan acquisition as well as this proposal). As this proposal is only expected to be completed in the 4Q11, the full-year impact would be in FY12, lifting the current consensus FY12 net profit estimate to around RM70-80m. Assuming 846m enlarged share capital, this suggests an FY12 EPS of 8.3-9.5 sen or a PER of 10.6x. Tentatively assuming a target PER of 15x, i.e. in line with our target for the market, this implies a fair value estimate of RM1.25-1.43/share.