Oil & Gas - Petra Energy Block Goes For RM1.68/share

THE BUZZ

Yesterday, Perdana Petroleum and Wah Seong Corp announced that they had entered into a conditional share agreement whereby Perdana will sell its 57.7m shares in Petra Energy, representing a 26.9% stake, to Wah Seong.  Total consideration is RM96.9m or RM1.68/share.

OUR TAKE

A win-win for all. We are positive on this disposal as we believe the deal will benefit all three parties. For Wah Seong, the company can now generate recurring income from Petra Energy’s brownfield services to complement its existing one-off pipe coating business, while Perdana will have the cash to repay some of its borrowings and finance part of its working capital. As for Petra Energy, Wah Seong may be a better fit than Perdana, since the acquirer is not a direct competitor. Petra Energy would also be able to tap on Wah Seong’s wide geographical presence to extend its brownfield services.

Perdana to pare down debts with proceeds. According to the announcement, Perdana will utilize about RM65.5m, or 68% of the total proceeds of RM96.9m, to repay its borrowings. Some RM28.4m will be used as working capital and the balance RM3.0m to finance the expenses of the corporate exercise. Also, as illustrated in the announcement, Perdana would be able to marginally reduce its gearing to 0.4x from 0.6x, based on its total borrowings of RM274m as at Dec 2011.

Wah Seong to dig into internally generated funds. Wah Seong is capable of doing so since it has gross cash amounting to RM578m as at 1QFY12. At RM1.68 per Petra Energy share, we estimate that Wah Seong would be paying a PER of 15x F12 EPS for the Perdana block, which is at a slight premium to our O&G sector average valuation of 14x. Nevertheless, we still believe it was a good purchase for Wah Seong overall.

No change to Wah Seong’s FY12-13 earnings. We are keeping our earnings forecasts for Wah Seong unchanged for now, as the contribution from Petra Energy will be immaterial, at an estimated RM7m, or 6%, of our FY13 forecast for Wah Seong.

Maintain Overweight on O&G sector. We also maintain our Buy call on Perdana (FV: RM0.90) and Petra Energy (FV: RM1.50), and Neutral on Wah Seong (FV: RM2.06) for now.

Source: OSK