Monday, April 04, 2011

Why Perisai Is Rated So High By The Local Analysts?

Here's a simple question that needed to be addressed in regards to .

If the rm 210 deal involving the purchase of Garuda Energy from its ex major shareholder is so questionable, why are research analysts from folks like RHB and CIMB rating the stock so much higher?

Yes, why? Now this is a very logical question to ask, yes?

Take RHB. They gave a estimate fair value of RM1.25-1.43 per share for Garuda.

Why? For me, I would look at their reasoning.

From the posting RHB Clarifies Its Statement On Perisai

♦ 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that all our concerns as highlighted in our RHB Equity 360 report were factually inaccurate and the report has been withdrawn.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.

My comments: Again as stated before the potential is a mere USD25 per annum revenue. (revenue and not profit). I am also curious the statement 'NOT the same asset'. Look that asset is going to be 'refurbished' (Yes, going to be refurbished. The rig is not even fully converted yet! and yes, Perisai is buying a refurbished unit. A reconditioned unit.). So doesn't the 'refurbished' unit comes from the very same asset???

♦ 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.


My comments: RHB is now declaring that the NET PROFIT contribution from the charter works out to be RM 40-50 million and the very basis of their reasoning that Perisai should be worth around RM 1.25 to 1.43 per share.

Now that's their reasoning and based on their estimated earnings they reckon Perisai should be worth that high.

Simple question to ask is what if their estimate is way too optimistic?

Ah... why such a question?

Reasoning is simple also.

The higher the estimate the higher the assumed fair value is.

Yes?

From my flawed mindset, I would ask the following questions...

The obvious glaring thing for me is that Perisai's own comments is that Garuda is only giving them a USD 25 million revenue per annum. To be exact, let me paste again.


  • 9) The expected revenue of USD25 million is based on the bareboat charter to be entered between the Target Company and GEM.

Using a slightly higher USD exchange rate conversion of 3.1 to the Ringgit, this would be about rm 77.5 million expected revenue per annum.

And is 'expected' revenue only. Sometimes the figure can be lower.

Now what's RHB estimated PROFIT? Let me quote them again:


  • Our back-of-the-envelope calculation suggests net profit contribution from the charter to be around RM40-50m,

rm 40-50 million per annum??

Take the lower number, 40 million.

So RHB is saying from a revenue of 77.5 million, the net profit contribution should be at least 40 million????

WOW!

Isn't that an extremely profitable business?

But is the charter of a MOPU such a profitable business???

Is that possible?

Now the following document is posted by Perisai: PERISAI-announcement(290311).doc


  • The bareboat charter of MOPU business is a competitive industry, with other players operating in the Malaysian market. Competitive factors include price and quality of services as well as the quality and availability of MOPUs.

Those were Perisai's own words.

The bareboat charter of MOPU is a competitive industry!

If that's the case... how did RHB analyst come out with an estimate net profit contribution of at least rm 40 million??

Hey in terms of net profit margins, RHB is saying a net profit margin of 40/77.5 = 52%!!!!

A 52% net profit margin estimation when Perisai declared that "The bareboat charter of MOPU is a competitive industry"!

WOW! WOW! and WOW!

Think about that.

And the other silly question I would ask is if Garuda's earnings potential is good, ie 40-50 million per annum, why is Nagendram selling Garuda to Perisai for only 210 million????

How?

Think about it. Is RHB estimate way too optimistic?

What if.... Perisai's earnings from this charter business is only worth say 10 million per annum. Adding in Intan Offshore possible earnings contributions and Perisai's own business, perhaps a 40 million net earnings is pssible.

Now the problem with a 40 million estimate, based on an extremely enlarged new share base of 845.791 million shares, this would work out to an eps of only 5 sen per share!

And get this... if I use a 15x multiple on Perisai, this would equate to rough estimate of only 75 sen!

Ok. Of course that's a flawed simple thinking.

However, you can play around the numbers yourself. Yes, PLEASE DON'T USE MY FLAWED ESTIMATE OF 40 MILLION! :=)

You could use a net profit estimate of 50 million. This would equate to an eps of only 6 sen!

What about CIMB Research? Here's a snap shot.




    • Perisai is paying US$70m (RM210m) in cash and shares for Garuda Energy (L) Ltd, owner of a jack-up rig that is being converted into a MOPU, which will be supplied to an oil major. We estimate that Garuda will contribute RM40m p.a. to Perisai’s bottomline effective 4Q11. In view of this, we raise our EPS forecasts by 25.0% for FY11, 76.8% for FY12 and 67.6% for FY13.

    Same.

    CIMB also is using the estimate value of Rm 40 million!

    How?

    Ah.. perhaps their (RHB and CIMB) estimates are all spot on... and my posting is simply flawed!

    Yes, that is is very much possible but whatever it is, best you think about it.

    16 comments:

    Mr ICICI said...

    u know why?

    it's so easy.

    we could take a look at which banks does perisai borrow money from?

    does this ex-major shareholder have other privately held companies? and which banks do these companies deal with?

    if let's say perisai needs to do some corporate exercises (e.g. placements, rights issue), do you think they can go to a bank that has a sell call on its stock?

    so what's the reason?
    the reason is...it's ALL good business!

    snowball said...

    When people try to justify the unjustifiable, funny figures tend to come out. But, most retail investors don't care anyway. They care about the final figure, the target price. Who cares how they derive the TP, they say. They like to listen to positive story, no matter how improbable it is.

    The IRR of this deal, ranges from 16-24%, if they levered up assuming 50:50 debt to equity funding, it could be 32%-48%. With such good returns, you wonder why not more people are building a MOPU. It makes me want to build a MOPU too.

    Moolah said...

    snowball: some say when the stock is the frying pan, it's simply a waste of time to talk logic.

    :=)

    snowball said...

    @Moolah,

    I guess you are right. As you says, stock somehow have a character on its own that is detach from the business :-)

    yauwenchin said...

    I believe they have conveniently ignore interest cost and amortisation on deferred expenditure. I happen to work in a shipping and oil and guess industry.

    gwynwelsh said...

    Dear Moolah,

    Sorry out of topic. But I could not help to point out to all and sundry that Coastal went so high from the low of RM2.25. It was strongly suggested by Koon Yew Yin, the same person who holds 32 million Xingquan shares. If he is right on Coastal, I believe he will to on Xingquan.

    gwynwelsh said...

    Dear Snowball,

    Koon Yew Yin strongly suggested Xingquan and he holds 32 million shares. He was recently suggesting Coastal when it was trading at RM2.25. He holds more than 20 million Coastal.

    This tend to make me believe he knows something On Xingquan that we all don't.

    William said...

    This kind of transaction sounds familiar only with slightly different touch, remember, guaranteed returns from vendor. Only this time is a contract of 2+1+1, not saying here that the vendor is out to cheat, cos he is also buying into the company, only that he is making more out of this, meaning other share holders lose out. He is getting his shares at 30% discount, while his asset is valued at 40% more. How to refuse? How not to get rich?

    Moolah said...

    LOLOLOLOL!

    Yeah.. how NOT to get rich?

    Mun Wai said...

    Read a report by UOB KH dated today on this armour stock, yes, it is Perisai again.

    UOB says the "Management" had "guided" for RM40m annual net profit contribution from Garuda...after they meeting up with the CEO recently (dun know how recent leh ?)

    Hmm..seems to me that the CEO meets up with analysts of different houses on different occassions. May be if he were to meet with all (most)analysts at one go, he will get bombarded with loads of questions that make him feel like fleeing.

    So, with the benefit of hindsight, I "guess" the very same Management must have guided folks at CIMB regarding the estimated contribution of RM40m p.a.

    Wah! First hand, private, up-close and personal profit guidance, what a privilege! LOL! BTW, was CIMB the first to issue a report on Perisai lately?

    The funny thing I spotted in the CIMB report is all along they have taken ownership of the profit estimate of RM40m p.a. (they said it's their estimate)

    So, who follows who? That CEO just agree with CIMB n take the RM40m figure or vice-versa?

    Moolah said...

    Mun Wai: On 8th Mar 2011, CIMB iniated coverage on Perisai. This was b4 Garuda deal.

    It said:

    Initiate coverage with OUTPERFORM. We like Perisai for several reasons 1) This under-researched stock is underappreciated. 2) The company is set to benefit from opportunities in the deepwater transport & installation segment. 3) Skilled new management is firmly in place and is backed by Ezra’s operational strength. Gone are the days of corrosion control and earnings volatility as the company is now streamlined with a focus on vessel chartering. Our initiation is timely given Perisai’s recent clinching of a Petronas licence and ongoing acquisition of a vessel operator. We begin coverage with an OUTPERFORM call and a target price of RM0.80, which implies 38% potential upside. Our target price is pegged to our target market P/E of 14.5x. The potential re-rating catalysts are 1) a growing fleet of strategic assets, and 2) success in new markets.

    Moolah said...

    On 30th March (see clip on this posting) CIMB commented on the Garuda deal.

    It said the following:

    Annual profit contribution of RM40m. We estimate that Garuda will contribute RM40m p.a. to Perisai’s net profit, with maiden contribution to be booked in 4Q11 after hook-up and commissioning. At RM40m net profit, the acquisition P/E is cheap at 5.3x. Given its Labuan-registered status, Garuda is subject to a fixed tax rate of a maximum of RM20,000/year under the Labuan Offshore Business Activity Act, 1990. The E3, which is registered in Labuan, is also enjoying the tax benefit. At our event yesterday, Izzet indicated that Perisai will seek to register Intan’s vessels in Labuan to enjoy the tax benefit. Intan has been paying the statutory rate. Intan’s Labuan registration would boost our FY11-13 EPS forecasts by 2-4%. We have not imputed Intan’s potential tax benefit into our forecasts.

    Moolah said...

    And yes, 40m was CIMB and RHB's estimates.

    LOL! Incredible that they can be so precise on that figure.

    Moolah said...

    On the 19th April: CIMB came out with a 12 page report (filled with colour photos too! :P )

    Ahem!

    Moolah said...

    ps: I did not want to mention it in a new posting cos some might be thinking I am hell bent on pushing down the stock with my mighty VoDoo stick!

    Quote:

    Maintain OUTPERFORM. Our recent meeting with Perisai’s management yielded these takeaways on the Garuda acquisition 1) There may be a profit guarantee and our RM40m annual net profit forecast may be conservative. 2) With the acquisition, Perisai will get a refurbished, technically niche asset with a ready, long-term contract. 3) The deal is not a related party transaction, and 4) It may invest in more MOPUs as Perisai is eyeing marginal field opportunities. We reiterate our view that the Garuda purchase is positive for Perisai and supports the company’s 3-year EPS CAGR of 87.9%. We maintain our forecasts and target price of RM1.40, still pegged to our target market P/E of 14.5x. Perisai remains an OUTPERFORM, with the potential share price triggers being 1) a marginal field venture, and 2) fleet expansion.

    Mun Wai said...

    Ar...I missed the colourful photos. Thought my dealer didn't sent me reports on 19 April...

    But apparently I overlooked because I was bz visiting the Cow's blog on April 19...

    So long a report...did folks out there reacted buy,buy,buy,buy,buyyyy?