This article first appeared in The Edge Financial Daily, on October 9, 2015.

Perisai Petroleum Teknologi Bhd
(Oct 8, 36.5 sen)
Downgrade to sell from hold with an unchanged target price of 30 sen: Perisai Petroleum Teknologi Bhd has proposed a private placement of up to 119.3 million new shares or approximately 10% of the existing issued and paid-up share capital.

The proceeds will be utilised as repayment of bank borrowings and capital investments for jack-up rigs, mobile offshore production units and working capital.

Assuming RM25 million from the total proceeds raised will be used to repay bank borrowings, we expect interest savings of RM800,000 per annum.

Overall, the dilution impact on earnings per share (EPS) for financial year 2015 (FY15) and FY16 is estimated to be around 3.6% and 7.5% respectively.

Net gearing is expected to reduce slightly from 0.92 times to 0.9 times. 

We are neutral on the proposed private placement as this will strengthen its financial position but EPS-dilutive.

We remain cautious about assets owned by the company, such as drilling rigs and offshore support vessels, due to continued pressure on charter and utilisation rates.

At the current rate of about US$100,000 (RM422,000) per day, earnings before interest, taxes, depreciation and amortisation remain positive, but in order to be profit-and-loss-positive, we estimate that utilisation rates need to be as high as 85%.

If taken into account interest expenses and principal repayment, its cash flow is likely to be negative at the current average charter rate of US$100,000 per day.

Worldwide new-build order book is 130 units or 27% of the existing fleet of 480 units. In order to adjust the oversupply situation, the industry needs higher levels of scrapping activities.

Given the current soft market, Perisai has delayed the delivery of its second rig from Aug 15 to the first quarter of 2016, which will provide more time for it to search for potential contracts before delivery. — Hong Leong Investment Bank Research, Oct 8