What Do You Look For In A Research Report? Part II

Price targets. Again for most market punters, price target is everything. Absolutely.

Eat porridge or eat rice also depends on how juicy the price target is.

All we can hear is '... but XYZ (brokerage house) said price target was 5.00 leh... so buy, buy, buyyyyyyy!' ( or is it bye, bye, bye? :P )

An infamous old story retold. It was 11 March 2004. The stock last traded 4.16. The stock had already gone up a lot. Seriously a lot. ( Exactly a year ago, before the stock was trading at 4.16, it was trading less than 90 sen! )

That was a massive movement, yes?

And the stock? Seriously? Its fundamental was shocking. :P

March 2003: Quarterly rpt on consolidated results for the financial period ended 31/12/2002. It reported yearly loss of 6.6 million. The previous year it lost 7.4 million.

But yet... somehow.. miraculously... its shares were in demand. Yes, somehow, someone in Aug 2003, had the hindsight to buy a 10% stake in this loss making company.

Private Placement of 4,725,000 new ordinary shares of RM1.00 each ("Private Placement")

And somehow... in yet another miracle of miracle... the stock soared and soared... it flew up, up and away to the orbit. By 11 March 2004, it hit 4.16.

Now that 10% private placement investors must be much better than Warren Buffett! Bought 10% in Aug 2003 at 1.00. Comes March 2004, the shares were worth 4.16.

No need to even talk about the stocks fundamentals. Who needs fundamentals? Who cares if the company is losing money? Who really cares?

Do you care? Why you want to make so much noise? You no make money in it? Don't be a sore loser! Stop your moaning!

Even Bursa smacked the stock with the UMA or UNUSUAL MARKET ACTION .

And so there we were.

On 11 March 2004, the stock closed the previous trading day at 4.16 and in came OSK with an truly amazing, out of the world BUY recommendation on the stock, giving the stock a target price of 5.00!

Yo dudes! Yo dudettes!

This is the stock yo! It's worth 5 bucks a pop! And it's only trading at 4.16.

You want or not?

I was amazed. Seriously, that so-called analyst must be extremely skillful. No joke. It's not easy at all. The stock had ZERO earnings. Losing money. And the stock had almost gained 5 folds since a year ago. Yet, this analyst could come up with a BUY recommendation with a 20% call!

Now that's skills!

Eat your heart out Goldie!

Here's a screen shot.

As can be seen, at 4.16, the stock had a market cap of around 226.3 million!

This was the stock's most recent quarterly earnings before March 2004. (LOL! Now that's 10 years ago, babe! :P)

Quarterly rpt on consolidated results for the financial period ended 31/12/2003

Look at the revenue? 34 million only. Yeah revenue only. And yet the market is valuing the stock at 226.3 million already. ( ho ho ho .. life is good! (how many times must I tell you this?) )

And somehow, OSK young analyst then, could came up with a report, suggesting that this company is worth....... another 20% more! Gee another 20%? That means the stock's market cap is suggesting the company is worth 271 million!

It doesn't matter the stock lost money the last 3 years, it doesn't matter the sales turnover is only a mere 34 million! And it certainly matters not the poor balance sheet it has! It doesn't matter that it had net debts of over 50 million! And it seriously doesn't matter that the company had some 273 thousand ( that's not a typo! So stop starring at me! LOL! :P ) only in its piggy bank!

Good is good eh?

And incredibly, the analyst DID acknowledge the concerns of the stock's track record!

In an effort to learn more, let me reproduce by pasting the exact words:

Concerns on Track Record

Productivity after the lull

We note that Timberwell has not conducted large scale timber extraction for the past 3years and that its mills have run on low capacity since 2002. As such, there is concern that its productivity and EBITDA margins may be lower than that of its peers.

Net debt of RM54.8m

Timberwell may focus on clearing its debt before it pays out any dividend as its current interest expenses have averaged RM4m over the past 4 years. Nonetheless, with the increased optimism in the timber sector, Timberwell may be able to restructure or refinance its debts over a longer period.

Valuation

Fair value at RM5.00

We have estimated an average price of USD320 per cu m for Timberwell¡¦s plywood prices and USD360 per cu m for its sawn timber given the recent run up of prices. We have also forecasted a CAGR of 2.6% for plywood and sawn timber prices. Based on these estimates, our EPS forecast of 26.3 sen for FY04 means Timberwell is trading at 15.8x projected PER. This is a 16% discount to the timber sector PER of 18.8x as of 10th March. With the revaluation of FMU3 which will be submitted for approval this quarter, Timberwell is also trading at 0.9x of its book value.

Timberwell has outperformed the KLCI by over 200% since December 2003. This may reflect the growing realisation that its sustainable forest concession gives it a big advantage as long as the company is able to extract what has already been allocated to it. Based on our Discounted Cash Flow model, we value Timberwell at RM5.00 given its potential for long term stable earnings. The value is price sensitive, with a 1% increase in the CAGR of log, plywood and sawn timber prices resulting in a fair value of RM5.81 while a 1% reduction in the prices CAGR gives a fair value of RM3.95. The stock is currently trading with a potential upside of 20.2% based on assumed prices for log, plywood and sawn timber.

There you go.

Do you like the way the analyst had reasoned the stock should be worth that much?

First, "An independent valuation of FMU3 has priced it at RM220m. This translates into a huge jump for Timberwell's assets and a corresponding 4.12x increase in its NTA/share from RM1.21 to RM4.99" A re-evaluation of asset.

It then brushes aside the net debt issue. ( I wonder if the analyst saw the company had only 273 thousand left in its piggy bank!)

Then it gave an EPS forecast of 26.3 sen!

Fantastic! From losing money the last three years, Timberwell earnings is supposed to drop from the heavenly skies. The stock earnings for fy 2004, despite all the recent year losses, is projected to be 14.3 million or an earnings per share of 26.3 sen. Yes babe!

From zero EPS to a 26.3 sen EPS! WOW! Well done!

And then... of course... to spice it up... a DISCOUNTING CASH FLOW model is created for Timberwell.

All the right ingredients eh?

So here comes the trick question.

Is the TARGET PRICE important or what is more important is the reasoning why the stock deserves such TARGET PRICE?

Think about it... :P

On 11 March 2004, the stock opened at 4.16. Had a high of 4.18 and a low of 4.02. It closed at 4.06.

Ok... stop laughing.

Please.

The very next day.... err.... the stock.... PLUNGED!!!!!!!!!!!!!

No joke!

TWO TRADING DAYS later, the stock closed at 2.74!

From 4.16 to 2.74!

Holy moo moo cow!

Take a look!

And get this.

A year later, Feb 2005, if one takes a look at Timwell's quarterly earnings, Quarterly rpt on consolidated results for the financial period ended 31/12/2004, one would have realised that the FY 2003 final audited losses were adjusted to 5.95 million! And yeah, Timwell had losses for FY 2004 too! And it had losses for FY 2005 too!

Of course OSK has its Disclaimers nicely inserted back then!

• The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.

Remember that.

Remember they accept no liability for any direct or indirect losses!

Of course they have since changed the wordings slightly.

• All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned.

So how?

Is the TARGET PRICE important or what is more important is the reasoning why the stock deserves such TARGET PRICE?

Of course, hackers would scream out loud!

Hindsight is simply story telling!

Here are some of the more recent ones.

Remember the JCY story? (Oops that passed a long time already yes?) 27th Aug 2010: Regarding JCY International

• JCY earned some 207 million for its fy 2009. CIMB says times are good in 2010, so JCY should earn some 359 million! And 2011, JCY earnings will be even more super. JCY should earn some 441 million by then!

And JCY's Target Price of 2.68 was based on this projection. A projection that JCY should earn 441 million.

And the reality?

• .... JCY's total 3 quarters so far is only 198.944 million. And to make matters worse, the earnings are declining each quarter. Would JCY even post a net earnings of 250 million for its fy 2010? I dunno. And what's CIMB's estimates again? 359 million for 2010 and 441 million for 2011!

Clearly, back in Aug 2010, one could clearly see that CIMB numbers were way too optimistic.

And sadly, JCY started missing... and the downgrade of earnings had to be made.... and with it ... the downgrade of Target Prices.

Do remember JCY has 2044 million shares!

Simple exercise for fun. Do you think JCY should trade at around 1.00?

Let's back track. For JCY to trade at 1.00 and at a PER of 12x (why 12x? Well that's what folks like CIMB had been using for JCY) JCY eps should be around 8.3 sen. And based on 2044 million shares, this would translate to an earnings of 169.652 million. Ok so far?

Is an earnings of 169.652 million possible for JCY?

JCY Q1 earnings is only 7.5 million only!!!! Can JCY's remaining 3 quarters earn some 162 million? Or an average of 54 million per quarter? From 7.5 million per quarter to 54 million per quarter?

Ok. How about a more recent example?

Take Perisai. Have you not heard people suggesting out loud that Perisai target price is 1.43?

Yes?

Did you hear that?

Why 1.43?

Cos the anaylsts said so!

:P

Seriously. Is the target price all that matters?

Or should one take the time and read how the anaylsts are reasoning why the stock is worth so much?

From this month's posting: Why Perisai Is Rated So High By The Local Analysts?

Let me paste what's written here again:

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.

So how?

Is the TARGET PRICE important or what is more important is the reasoning why the stock deserves such TARGET PRICE?

Read more...

More Interesting Statement On Perisai

Since I had blogged too few times on Perisai, I was most interested to read Star Biz article Should Perisai deal be deemed an RPT?

One passage caught my attention.

• To be noted is that Perisai has clarified the following - that Garuda Energy was made up of “an old jack-up rig” when it was disposed to Nagendran in 2010. The rig then was without any contract and, furthermore, Perisai did not intend to take on any construction risk to rebuild it into a mobile offshore production unit (MOPU); hence, Perisai had decided to dispose of the rig in 2010; Garuda Energy will also own a MOPU that is expected to have a certified 15-year life span and that one of the conditions precedent to the completion of the deal is the receipt of the charter payment from the major oil company.

Don't understand the part in red bold.

The rig acquisition was announced on Dec 2009: PERISAI PETROLEUM TEKNOLOGI BHD ("PERISAI" OR THE "COMPANY") ACQUISITION BY GARUDA ENERGY (L) INC AND HUMMINGBIRD ENERGY (L) INC, BOTH WHOLLY OWNED SUBSIDIARIES OF PERISAI OF TWO JACKUP DRILLING RIGS FROM THE OFFSHORE DRILLING COMPANY AND CLIFFS DRILLING COMPANY FOR A TOTAL CASH CONSIDERATION OF USD10,000,000

From the word file attached: Announcement_Garuda purchase of rigs 14 Dec 2009 Final.doc

• 4. RATIONALE FOR THE ACQUISITION OF RIGS Discovery of large oil & gas fields are becoming rare. In order to maintain current production levels, oil and gas field owners in the Asia Pacific region are looking at viable solutions for developing marginal fields.
  
  With the recent increase in crude oil prices, there is a need to fast–track field developments that have been put on-hold due to global credit crunch over the last one year or so. Oil and gas field owners are looking for low-cost solutions to develop marginal field as quickly as possible. The Acquisition of Rigs will provide a platform to convert the Rigs into MOPSUTM” and to generate robust earnings by hiring them to these oil and gas field owners.
  
  The acquisition is synergistic to the evolved activities of Perisai to serve as a one stop centre for its planned marginal field development and deepwater activities. The conversion will take advantage of the current low steel prices and fabrication rates and provide an avenue to bring in the profits earlier than anticipated.

There. From Perisai own words the rigs will provide a platform to convert them into MOPSUTM.

That was Perisai rationale for buying the rigs.

The rigs acquisition was completed on April 2010.

PERISAI PETROLEUM TEKNOLOGI BHD ("PERISAI" OR THE "COMPANY") ACQUISITION BY GARUDA ENERGY (L) INC, A WHOLLY OWNED SUBSIDIARY OF PERISAI OF A JACKUP DRILLING RIG FROM CLIFFS DRILLING COMPANY

• The Board of Directors of Perisai is pleased to announce that its wholly owned subsidiary, Garuda Energy (L) Inc (“Garuda”) had on 28 April 2010 completed the acquisition of the jackup drilling rig namely Hercules 191 from Cliffs Drilling Company

A week earlier, on 21 April 2010: PERISAI PETROLEUM TEKNOLOGI BHD ("PERISAI" OR "THE COMPANY") SALE OF SHARES BY NAGENDRAN C. NADARAJAH OF ALL HIS DIRECT AND INDIRECT SHAREHOLDINGS IN THE COMPANY TO HCM LOGISTICS LIMITED

• Further to the announcement on the sale of shares by Mr Nagendran C. Nadarajah ("Nagendran") of all his direct/indirect shareholding in the Company to HCM Logistics Limited ("HCMLL"), the Board of Directors of Perisai wishes to announce that the Share Agreement dated 9 April 2010 between Nagendran and HCMLL has been completed.

Not too many days after the rigs acquisition was completed, on 10 May, Perisai annnounced they were disposing Garuda! PERISAI PETROLEUM TEKNOLOGI BHD (“PERISAI” OR THE “COMPANY”) Proposed disposal by Perisai of the entire equity interest in Garuda Energy (L) Inc (“Garuda”) and Hummingbird Energy (L) Inc (“Hummingbird”) to Nagendran C Nadarajah for a cash consideration

That was May 2010.

And its now April 2011.

errr... how?

Let me get this right.

First Perisai bought and said "The Acquisition of Rigs will provide a platform to convert the Rigs into MOPSUTM” and to generate robust earnings by hiring them to these oil and gas field owners". Then days after the purchase was completed it said was sold.

Today, I am reading that Perisai is now saying "Perisai did not intend to take on any construction risk to rebuild it into a mobile offshore production unit (MOPU); hence, Perisai had decided to dispose of the rig in 2010."

Huh? Huh? and triple huh?

And now, 10 months later, Perisai wants to buy a converted MOPU??

Comeon!

ps: He will be paid partly in stocks, which are priced at 65 sen!

How much is Perisai now?

What a capital idea to push Perisai much higher.

Read more...

Why Perisai Is Rated So High By The Local Analysts?

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

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.

Read more...

More On Perisai

So much has been written about Perisai and I am sure much more will be said about Perisai in the near future.

So where are we now with Perisai? We know that Perisai soared from 73 sen on 23 Mar and by 31 Mar it hit a high of 93 sen. And during this period, Legg Mason Sold Every Single Share Of Perisai They Had Bought On 23 Mar 2011

Yeah every single share purchased by Legg Mason has been sold.

Makes you wonder why Legg Mason entered the trade on 23 Mar.

And no I would NOT dare insinuate that Legg Mason got some privy info and after all on Friday, April Fool's day, Perisai explains its proposed Garuda Energy deal‎ on Star Biz.

However the last statement was interesting.

• “The reason why we made the announcement is because we did not want speculation on our share price while we were starting to talk (with Nagendran). So we carved out some basic terms while we pursue due diligence,” he said. ( he = Perisai managing director Zainol Izzet Mohamed Ishak)

Perisai's MD declared they did not want speculation.

But here's the chart of Perisai on 31 st Mar 2011 ( Perisai's Garuda deal was announced to the local media on 30 Mar)

Now if Perisai was gauged on its earnings, in my flawed opinion, I thought it wsn't the best of the best of all oil and gas stocks but neither it was the worst. It was just really average. And could an average stock soared like that without speculation? I wonder.

To back up my average claim, for example, take a brief look at its recent earnings.

Feb 2011: Quarterly rpt on consolidated results for the financial period ended 31/12/2010 - Perisai made 6.929 million for its Q4 quarterly earning. Not bad. But when you look at total fiscal year - Perisai made only 10.2 million for fy 2010 compared to an earnings of 32.98 million for fy 2009. Obvious question is why the drastic decline in yearly earnings?

Nov 2010: Quarterly rpt on consolidated results for the financial period ended 30/9/2010 - Perisai lost some 8.6 million for the quarter.

Yeah.. that's my reasoning why I am saying "Perisai was gauge on its earnings, it wsn't the best of the best of all oil and gas stocks but neither it was the worst. It was just average. "

So with a stock having average earnings, surely some strong speculation existed to drive that stock so high, yes?

Now that's my flawed reasoning. Which is why I am confused why the MD said on April Fool's day that “The reason why we made the announcement is because we did not want speculation on our share price while we were starting to talk (with Nagendran). So we carved out some basic terms while we pursue due diligence,”

And why did Legg Mason buy and exited in such a haste? (ps: The amount sold represented a 5.1% equity stake in Perisai! )

How? What's your own conclusion on this?

Now the Garuda deal.

In a deal, most would ask is the deal priced fairly ( I hope I can use the word FAIR and I hope I would not get whacked like how Sir Alex Ferguson got whacked for using the word FAIR! :P ) and what kind of benefit or reward does the deal bring?

Now if one is a minority shareholder, these are the questions you would want to ask, yes? Yes, as a minority shareholder, you are indeed part owner of the business and as a part owner of a business these are the very questions you would want to ask!

Is the deal (Perisai's purchase of Garuda) priced fairly?

Now in the posting Featured Post: Legg Mason Sold Every Single Share Of Perisai They Had Bought On 23 Mar 2011 , snowball makes a simple comparion:

• With all that technical stuff being clear up, I think I can be pretty certain that Kencana is also building a MOPU for production in marginal oil fields in Malaysia. Kencana build it for RM115mil while our friends in Perisai said that their MOPU cost RM210 mil (taken directly from filings, without adjusting the discount in value of the share component of the acquisition), almost 83% more than Kencana.

Yes, why Perisai's purchase of Garuda's MOPU cost 83% more?

In the posting, Perisai's Reply To Bursa Query, Perisai furnish data on the impact on the Net Asset per share and share capital. The snap shot was most revealing.

Note the huge jump in Perisai's total borrowings? Snowball too had highlighted this issue.

• They assume RM120mil of debt on top of the RM210mil paid to Nagendren. Since when does debt is not an important part in an acquisition? There is not a need to tell shareholder on how much debt you have taken? To hide in under the footnotes seems to indicate that Perisai do not want the shareholders to know.

Garuda carries RM 120 million debt in its balance sheet!

And when Perisai buys Garuda, perhaps the debt is the freebie for Perisai! LOL!

Now does that sound like a good deal?

And as we are aware the MOPU is not completed. Perisai is buying a company for a MOPU that is not fully converted. And the company, Garuda, carries a 120 million debt.

Ah.. some inquiry mind would wonder what if this debt is used to complete the conversion of the MOPU? Is that not possible? If so, what a sweet deal, eh?

Now what kind of reward does the deal bring?

From Perisai's Reply To Bursa Query, Perisai said:

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

USD25 million revenue per year was all that was said by Perisai. No profit guidance. Not a single sen. And yet this is a 210 million deal. A 210 million deal with no profit guidance!

Now this figure is being questioned by snowball in his latest posting http://goodstockbadstock.blogspot.com/2011/04/extended-version-oi-perisai-apa-macam.html

• So, the contract is worth RM36.7 million per year or USD12.2/million per year. Wah, Perisai MOPU charter rate is USD 25mil/year while Tanjong MOPU charter rate is USD12.2/million per year. But, it seems that Tanjong Offshore get ripped off in this case as Perisai charter rate is much higher.

( snowball in his posting also address the possibility of different production capacity - do read his post why he thinks is not possible here )

Now if snowball reasoning is correct, why is Perisai MOPU's charter rate so much higher?

How? How would you interpret and analyse all this? Think about it.

Questions are asked why the MOPU is priced much higher and questions why this MOPU appears to be able to generate much more revenue than others?

Two important issue to address yes?

And again, like Prashan asked, what if Legg Mason smelt the rat here? Could this be the possible reason why it sold everything it had bought a few days earlier?

And oh... this posting is not about the stock. Please get this issue crystal clear!

Seriously, I have no motivation to know or guess how the stock would perform. In a hot market, any stocks stands a fairly good chance of moving higher despite all logical reasoning. Me? I rather keep my sanity and my logical reasoning and retire.

LOL!

Read more...

Featured Post: Legg Mason Sold Every Single Share Of Perisai They Had Bought On 23 Mar 2011

Apparently Perisai is getting interesting.

It's not surprising because hot stocks are hot for a reason.

It can really fly up, up and away to the moon!

Seriously, take Perisai. As commented in the posting, A Little Chat With Dali On Perisai , Perisai was 73 sen on 23 Mar and by 31 Mar it hit a high of 93 sen.

Now the date is rather interesting and an announcement posted on Bursa was rather revealing ( I would also say many thanks to Prashan for highlighting it in the posting A Little Chat With Dali On Perisai )

• From corrosion experts, to marginal fields and now to corporate Kamasutra. What is it with this former MD. Enter new management and the hoopla continues. And then come along the hallowed research houses that lap up dollops of blue sky from management and dribble it on reports. And others too who do their bidding, complicit (front running) or naïve, I wonder. Legg Mason have come and gone too. Did it smell a rat. Something smells rotten in Perisai.

Here's the revealing announcement on Bursa website: Notice of Person Ceasing (29C) - LEGG MASON, INC

Notice the purchase date: 23 Mar 2011.

Notice the disposal date: 31 Mar 2011.

Legg Mason on a short term trade?

WOW! Bursa share market so attractive meh?

And get this, the number of securities disposed: 35,393,700!! wow!!!

Man, they sold everything, yes they sold all the shares they had purchased on 23 Mar 2011.

Are they such a short term trader? Or is they something wrong?? ( Err... I don't think I will use the RHB report as mentioned in the posting A Little Chat With Dali On Perisai )

So how?

Now in a hot market, anything can and will happen. Needless to say, sometimes good rational reasoning and discussion will be ridiculed. As quoted by blogger snowball from the Good Stock Bad Stock, " .. those people that said that this is too theoretical, too non-real world. "Talk so much for what, as long as I make money from Perisai, okay already-lah")

Sadly how true that statement is. When someone is punting on the stock, they would find every which way to discredit any negative whispers on their stocks. Even highlighting the potential risk is a huge sin!

And since it's a hot market, when the stock moves up, they would boldly brag "See, talk so much for what? You are all talk! Do you even know how to make money?" or they will say "Your theory all wrong. If your theory is correct, why did the stock moved higher? Did you see that bloody stock soar so much higher?"

Some will even twist it! Yes, in order to stop your negative comments, they would use this as the perfect opportunity to put you down! Very easy. They will blame you and suggesting they had missed out on making money just because of your posting!

Seriously.

No joke.

You are wrong because the stock says so!

If so, what's the implication? Are they suggesting it's wrong to discuss or to use rational, logical thinking to justify one's investment or even trading?

The fact is the stock market will never ever agree with you ALL the time!

Why?

Stocks. They are stocks. Nothing but stocks. Anyone can buy a good or a bad stock. And anyone who has enough financial capital can drive any given stock up or down. Yes, a bad stock can be driven up. And guess what? A 'good' stock can be also driven up or down.

So what are we going to do?

What are you going to do?

What are you going to base you punt/trade/invest on?

Don't you even need strategies? Or don't you even need a rational thinking?

And hey so what if the market don't agree with you? Yes so what? Your own strategy is based on your own logical justifications. And if the market don't agree, so what? Are you going to die because you missed out on a so-called market opportunity? Can you die missing out on opportunities?

Take a look at the casino. Every day there are some huge winners. Are you going to make yourself a miserable just because you consider it a crime to miss out on these opportunities?

Yeah... exactly!

Get real.

:=)

Oh back to Perisai. ( LOL! Told you it was a long winded posting. :P)

So Legg Mason has announced that it had dumped all its Perisai shares it had bought on 23 Mar 2011.

Now this brings me to to snowball's posting "Oi Perisai, Apa Macam Lu Punya MOPU Manyak Mahal? Buat Dari Besi Kereta Perisai-ke? - Part 1

It's a very good posting. (Damn! Snowball, I need to retire already. :P )

Before you read it, if you own shares or if you have an open trading position in Perisai, do think for a moment, think from a different perspective.

Err.. yes.

Think for a moment. Imagine Perisai is not a traded entity. And you have zero interest.

Now read the article. ( Why? Sometimes people think differently just because it's a stock!) Here's a section from snowball's posting...

======================================

So, here's an attempt from an accounting student from the 98% of the population that are not smart enough to figure out oil and gas trying to talk oil and gas. The following discussion may contain material misstatement of information, but, I am trying my best to reduce the factual error. You may wish to skip the geeky technical term on the discussion. The technical term is just to make sure that I got most of the things correctly.

When I say I can Fly, It Doesn't Mean I Can Really Fly...

When the management said that the MOPU costs USD70 mil and that Nagendren (the seller and ex-shareholder) spent USD40 mil to refurbish it, we just take what they say at face value. Here's the first lesson on "Skepticism 101-Skeptic for Dummies"- When I Say I can Fly, It Doesn't Mean I Can Really Fly. When the management says the thing cost USD 70mil, it doesn't mean that bloody MOPU really cost USD 70mil. We should at least try to look at whether the figure is logical for that particular type of asset.

For people with limited knowledge, the easiest way to find out is to find comparables. Are there any similar MOPU that are being constructed recently? Trying to find even a single comparable is pretty hard as most O&G contract normally is being awarded in a package i.e. you have your MOPU, floating production, storage and offloading (FPSO) unit and etc. Even if you find a pure MOPU contract, that MOPU contract may involve chartering, maintenance and others. To find a pure MOPU engineering, procurement and construction and commissioning (EPCC) is a rather difficult job. In fact, if this deal were to be announced a month earlier, we do not even have a comparable.

However, some pure timing coincidence sees Kencana(KHL) being awarded an EPCC contract for MOPU at a cost of RM115 mil! Here' the link to the article and the relevant excerpt:

• Under the Contract, KHL is to undertake the engineering, procurement, construction and commissioning (“EPCC”) of MOPU and WHSS for Sepat Early Production System off the coast of Terengganu. The total value of the Contract is estimated at RM115 million. It is a one-off EPCC contract and is expected to be delivered to the ultimate client, Petronas Carigali Sdn. Bhd. within the third quarter of calendar year 2011.

The contract awarded to Kencana is actually part of a bigger contract awarded to Petrofac under an open tender system. The MOPU portion is being sub-contracted to Kencana. The ultimate customer of this project is actually Petronas Carigali. Here's the link to another relevant article that state that only Kencana is responsible for the MOPU part and no one else.

• Local partners supporting Petrofac on this project are Kencana HL, which will add all the processing equipment to the MOPU, and BumiArmada which will supply and install the FSO. The Front End Engineering and Design (FEED) work for the project was carried out in Petrofac's specialist FEED office in Woking, UK.

For those who are interested on the technical term FEED, here's the link to wikipedia description of FEED. It is basically a pre-project phase where engineers plan for the project. So, it is a very low cost phase and if part of the cost should added onto the final RM115 million cost, it would not be substantial. Plus, Kencana actually builds two things for RM115mil, they are not building the MOPU only.

Another technical term is Early Production System (EPS), people may mistaken Kencana contract as for EPS rather than for a MOPU, but, here's the definition of EPS by Petrobras - "installations which permit the entrance in operation of wells or areas, in a short space of time, to attain certain objectives which do not justify (technically or economically) the use of fixed or permanent installations." Basically the MOPU is part of the EPS. In certain instances such as marginal oil field, as stated in this article, EPS may be sufficient to drill for oil without the need of using a fixed or permanent platform in the marginal oil fields.

With all that technical stuff being clear up, I think I can be pretty certain that Kencana is also building a MOPU for production in marginal oil fields in Malaysia. Kencana build it for RM115mil while our friends in Perisai said that their MOPU cost RM210 mil (taken directly from filings, without adjusting the discount in value of the share component of the acquisition), almost 83% more than Kencana.

It is possible that Kencana MOPU is a "Proton" and Perisai MOPU is a "BMW". But, why you need a BMW when Petronas says a Proton is sufficient? It is like driving a Ferrari in a bad traffic jam in KL, the extra horsepower of the Ferrari is basically useless. Does the geological condition within Malaysia changes so much that in one area, the specification of a MOPU require to drill for oil in one area is RM115mil while in another area it cost RM210 mil ? It kinda defeat the purpose of the "M" in MOPU which stands for Mobile right? These MOPUs are supposed to be usable in any part of the country. Assume that in certain parts of the country really need a BMW-like MOPU, why on earth would Petronas want to drill for oil in an area that the CAPEX costs twice as much while the oil being drill from those area basically sells for the same price as oil from a low CAPEX area? Lol..I don't know. We can ask the "expert" at Perisai why their MOPU cost 83% more...

Rational Pricing and Brainless Pricing

To be fair to our friends in Perisai, let's assume that they indeed purchase a BMW-like MOPU. Let's assume that their MOPU indeed cost RM210 mil. Now, we move on to another area, the pricing of the entire deal itself, not just the cost of the MOPU. Perisai has been very sneaky, it tells the whole world that the cost of the equity portion is RM210 mil (same as the cost of the MOPU). What they do not tell us, at least not in a direct manner, is that, they will take on RM120mil of debt as well. Very smart, place the debt part in the footnotes.

• (1) The increase in total borrowings assuming the consolidation of the assumed borrowings of (i) the Target Company of RM120 million and (ii) an additional of RM150 million raised via external borrowings to fund the cash consideration for the acquisition of the Target Company.

This is taken on the footnote of their reply to Bursa query. They assume RM120mil of debt on top of the RM210mil paid to Nagendren. Since when does debt is not an important part in an acquisition? There is not a need to tell shareholder on how much debt you have taken? To hide in under the footnotes seems to indicate that Perisai do not want the shareholders to know.

So, this is not a RM210 mil deal, this is RM320mil deal. A 57% increase. What did Perisai buy for RM320mil. Well, they say that the MOPU cost USD60-70mil, so let's take the top range of USD70mil to be conservative. So, they pay RM210mil for the MOPU. The debt that is assumed is actually used to pay for : (i) an earlier start in income generation as building a new one actually took 6 months only and (ii) the 2+1+1 Charter contract. For this two perks, Perisai is paying 1.6x of revenue and 3x earnings, just to have that MOPU earlier. LOL..it sounds like those people that pay a huge premium to buy the latest IPhone from the black market because it is not being launch in their country yet. Let's give Perisai a benefit of doubt and see whether paying RM120mil for the 2 perks is a rational decision or not.

Let's assume that it actually took another 6 months to design, negotiate and seal a deal to construct a MOPU on top of 6 months to construct the MOPU. So, it take one year to design and build a new MOPU from scratch. Based on earnings estimate of RM40mil per year, the maximum you would pay for a one year of head start is RM 40 mil because if it cost more than that, it is better to construct a new one. Then, there is a charter contract, Perisai is basically paying RM80mil (120-40) for that Charter contract. The charter contract is a 2+1+1 year contract, so, Perisai is paying another 50% of the potential earnings from this contract. In addition, it is a 2+1+1 year contract, it is not a direct 4 year contract. The "+1+1" in most contract is basically a renewal option, if both sides agree, then only the contract is extended. So, if their customer do not agree in the third year, the contract will not be renewed. Wah...like that...it means that Perisai is paying RM80mil for a chance to earn nothing..zero...wow...if the contract is not renewed in year 3, they will lose RM40mil [80mil from 2 years of earnings- RM120mil (cost of early headstart +cost of charter contract)]. Seems like a pretty brainless decision, don't you think? You pay RM120mil for the option to lose RM40mil...The current MD is actually an actuarial science grad, aren't actuarist suppose to be good in numbers?

I don't know what to say. But, if any CEO of the companies I invested in actually get into such a blatantly disadvantaged contract, I would faster run away.

=======================================

Me: How? What do you think of snowball's set of reasoning? Is there any justifications?

Seriously, if Perisai is not a stock and if there is absolutely zero money making opportunities, ask yourself, what do you think of all this?

How?

And do take into consideration the Legg Mason trading issue.

Ah... why did Legg Mason dump all their shares they had bought?

Seriously, are Legg Mason fund stock market philosophy based on such short term?

What if... yeah... what if Legg Mason saw something it didn't like?

And snowball ends with a couple of ps (ds give his posting a read. It's much longer than what I had pasted here)

P.S: The deal is valued at around RM330mil, Perisai market cap is RM581 mil and its latest equity is RM233.5 mil. It is 57% of market cap and 141% of equity. To ignore this huge transaction and keep on buying regardless of the risk you are taking is irresponsible.

P.P.S: The whole MOPU inclusive of the jack up rig cost USD75mil (RM225mil), assuming all the money has already been paid up, which is not really a sure case, Nagendren fork out RM105 mil, while borrows the remaining RM120mil. For the risk that he is assuming for less than a year, Nagendren makes exactly 100% returns on his investment ([330-225]/105), a pretty decent return by any standards. It is so good that, even Buffett would be envious of his return.

( hey snowball, do not bother with those who thinks you talk too much. It's like this one la. Once they have a vested interest in the stock, they will find every which way to stop you from talking. Just tell them your talk is cheap and you have plenty more of it. :) )

Recent postings on Perisai:

• A Little Chat With Dali On Perisai


• Perisai's Reply To Bursa Query


• Perisai Asked To Explain In Details Its Purchase Of Garuda Energy


• RHB Clarifies Its Statement On Perisai


• Perisai: Life Is Too Damn Good!

Read more...

A Little Chat With Dali On Perisai

Dali, I see that you had posted a piece on Perisai called Over Eager Reporting and Research

• My View: The asset is properly priced. Although it has the same name, there has been tons of monies poured into the asset to bring it to what it is, and it comes with a strong recurring contract as well. It comes with a substantiated contract which will propel Perisai's earnings visibility enormously. My advice to all analysts and reporters, when something is so blatantly wrong, usually its not. When something is so blatantly good, usually its not. No one here seems to even bother to pick up the phone to confirm some facts, no fact checking at all. A call to Perisai's office would have negated all that. There were some 100m shares transacted all the way down, that is a massive loss for some people. Who were buying then??? The people who knew better. Who should be responsible for the losses incurred ... hmmm ... Still, the shares should continue its upward ascendency following this quite unecessary debacle.

Firstly, Dali, I do apologise for posting here and not in your comment box ( I will try to post my comments or the link to this post in your posting later). This is because my reply is rather long winded (as usual! LOL! ps: how are you ar? ) and it contain a chart pix.

1. You said "There were some 100m shares transacted all the way down, that is a massive loss for some people." Well is RHB to be blame? Did RHB contributed to the fall?

Here's the one hour chart of Perisai I just took.

From my lousy interpretation of the chart, Perisai started declining yesterday morning, 31st March 2011.

Now the news flash that was posted on 30th March 2011 on the Edge can't be found.

LOL!

Serious.

For some strange reason, I can't find the url of the article but that article can be viewed here: http://my.news.yahoo.com/flash-rhb-research-raises-concerns-over-perisais-acquisition-20110329-181406-445.html

As can be seen, RHB's comments was posted on Wed, Mar 30, 2011 9:14 AM MYT

And Perisai shares did not drop on Wed morning despite those comments posted online on the Edge website. In fact Perisai soared above 90 sen on Wednesday itself.

So for me, I would not blame RHB to be the cause for Perisai's reversal. That's my flawed opinion!

Now yes, I would probably agree with you very much that RHB analyst could have done better had she called up Perisai. A phone call would not hurt yes?

However, what about Perisai themselves?

Firstly the issues that was raised, those were rather logical questions, an analyst would raise and ask, yes?

From my own flawed personal ways, I would indeed prefer very much that an analyst or an report covers BOTH the potential rewards/benefits a deal brings and also the possible negative implication(s) arising from a deal. Yes, I indeed would prefer to see both sides of views.

Yeah, but in a hot market, when one is speculating/trading on that stock itself, it's a no brainer that one does not want to hear any whisper of risks at all.

That's normal and seriously, as you had known me from the good old chat days, I accept such behavior. It's normal la. It's like that one. :=)

So where are we now? LOL!

Oh yeah, the initial issues raised by RHB.

Let me paste here again.

• 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.

Are those questions not valid? Are those not issue of concerns? I could be wrong but I think so la. Perhaps RHB analyst should have called Perisai. I agree. But... but... but.... what about Perisai themselves? This was a 210 million deal involving its former major stakeholder! And did Perisai furnish Bursa with any details? Nope. All i saw was Perisai giving all the info ONLY when Perisai was asked by Bursa to furnish the details! Here's my screenshot of Perisai's current announcement.

Perisai announcement to Bursa on its Garuda deal was on 31 Mar 2011. Perisai announcement to the local media of its Garuda deal was on 30 Mar 2011. Me? I would only ask Perisai why! Seriously, this is corporate governance and transparency. But again that's me. ps: sorry for that long winded post (this is why I cannot reply directly on your site!) and yeah, I do like things long. :=)

update: do see this posting also: Featured Post: Legg Mason Sold Every Single Share Of Perisai They Had Bought On 23 Mar 2011

Read more...

Perisai's Reply To Bursa Query

Yesterday evening I made an update to the postings Perisai: Life Is Too Damn Good! and RHB Clarifies Its Statement On Perisai.

I posted Perisai Asked To Explain In Details Its Purchase Of Garuda Energy.

I left out the document attached to that Bursa announcement!

LOL! My, what on earth was my eyes starring at then? ( Could someone please smack me on the head? LOL! )

Many apologies!

Anyway, attached to that Bursa announcement was Perisai's reply: Perisai-reply to Bursa(310311).doc

PERISAI PETROLEUM TEKNOLOGI BHD ("PERISAI" OR THE "COMPANY") PROPOSED ACQUISITION BY PERISAI OF THE ENTIRE ISSUED AND PAID-UP SHARE CAPITAL OF GARUDA ENERGY (L) INC (“Target Company”) FOR A TOTAL PURCHASE CONSIDERATION OF USD70,000,000 TO BE SATISFIED BY WAY OF CASH AND THE ISSUANCE OF NEW ORDINARY SHARES OF PERISAI ("PROPOSED ACQUISITION")

We refer to our announcement dated 29 March 2011 ("Announcement") and the query letter from Bursa Malaysia Securities Berhad (“Bursa”) dated 30 March 2011 requesting for additional information in relation to the Proposed Acquisition.

A. At the outset we wish to state that we have entered into a Term Sheet which are subject to preconditions stated in our Announcement at paragraph 3.3 which we restate for ease of reference:-

3.3 The Proposed Acquisition is conditional upon satisfactory completion of the following Conditions Precedent:-

(a) Upon the Target Company’s receipt of the first bare boat charter payment from OIL CO, which evidence of receipt shall be furnished to Perisai;

(b) The Target Company securing an external borrowing sufficient to cover the cost of Mobile Offshore Production Unit (“MOPU”) conversion;

(c) MOPU is completed based on OIL CO specifications as contracted with OIL CO and Perisai being satisfied that MOPU has been completed in accordance with the specifications;

(d) Perisai Board of Directors’ and Shareholders’ approvals obtained;

(e) Regulatory approvals (including the listing of the new ordinary shares) being obtained to enable the parties to proceed with the Proposed Acquisition;

(f) Lenders’ approvals (if necessary) being obtained for Perisai to enter into the Proposed Acquisition;

(g) Perisai being satisfied with the results from the due diligence (technical, legal and financial) carried out on the Target Company.

In the event that any of the conditions cannot be satisfied within the stipulated time or the SSA is not executed within 90 days from the date of the Term Sheet (or within any such extended period as may be agreed upon by the parties), this proposal shall lapse and in such event, the Earnest Deposit shall be refunded within 14 days to Perisai together with 8% interest per annum thereon (calculated from the date that this proposal lapses) until the amount is fully settled.

B. On behalf of the Board, we wish to state our response following the numbered paragraphs of Bursa’s letter dated 30 March 2011:-

1) The proposal is transacted in United States Dollar. It is agreed that the number of consideration shares to be issued shall only be determined seven (7) days prior to the submission of draft circular to Bursa Malaysia based on the prevailing exchange rates between Ringgit Malaysia and United States Dollar on that date.

Based on current USD to RM rate of RM3.00 to USD1.00, the number of consideration shares to be issued would be approximately 92,307,692 Perisai shares. We refer to our Announcement which states “the issuance of new ordinary shares of Perisai (“Consideration Shares”) at an issue price of RM0.65 per Consideration Shares for the remaining USD20 million (equivalent to approximately RM60 million).”

2) The breakdown for the source of fund for the Proposed Acquisition is as follows:-

a) USD 50mil (equivalent to approximately RM 150 million) cash consideration is expected to be funded via internally generated funds and/ or external borrowings and/or issuance of new Perisai shares . The actual breakdown has not been finalized at this juncture. We shall notify Bursa Malaysia accordingly once the breakdown is determined.

b) USD20 million (equivalent to approximately RM60 million) balance consideration shall be via issuance of new Perisai shares at RM0.65 per share.

3) The principal business of the Target Company is owning and chartering of offshore assets. The Target Company owns a jack up rig, named Rubicone, which is currently being converted into a mobile offshore production unit (“MOPU”)in Singapore.

4) The date of incorporation was on 3rd December 2009.

5) We are informed by the Vendor the total cost for the MOPU including the conversion cost is expected to be in the region of USD60 million to USD 70 million. The construction risks lies with the Vendor and Perisai is not exposed to any costs overrun.

6) Save as disclosed below, Perisai will not assume any liabilities (including contingent liabilities and guarantees) arising from the Proposed Acquisition, save for those reflected in the balance sheets of the Target Company , which would be consolidated in Perisai Group’s accounts with effect from the Completion Date: The Group may be required to provide corporate guarantee(s) for the bank borrowings to be undertaken by the Target Company

7) The sole director and 100% shareholder of the Target Company is Nagendran C. Nadarajah.

8) Gryphon Energy (M) Sdn Bhd (“GEM”) was awarded the contract this year. We are unable to disclose the exact date of the award due to confidentiality.

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

10) The directors of GEM are Dato’ Dr Mohamed Ariffin bin Hj Aton, Nagendran C. Nadarajah and Puan Sharifah Zuraidah Bt Syid Mustafa Alqudri. The shareholders of GEM are Gryphon Energy (Asia Pacific) Sdn Bhd which holds 45% and Puan Sharifah Zuraidah Bt Syid Mustafa Alqudri who holds 55%.

11) The Purchase Consideration was negotiated on a willing buyer, willing seller basis taking into consideration the value of the asset owned by the Target Company and the potential earnings to be generated from the bareboat charter contract to be entered into with GEM, who has secured a 2+1+1 years contract from a major oil company.

12) The justification of the issue price at RM0.65 is based on an average price of Perisai shares at the point of initial negotiations.

13) The asset owned by the Target is a jack up rig which is currently being converted into a MOPU.

14) Based on audited accounts of the Target Company as at 31 December 2010, the Target Company has a Property Plant and Equipment book value of USD12.3 million and Total Assets of USD 13.6 million.

15) The Target Company which owned an old jack-up rig was disposed of to the Vendor in 2010. The rig then was without any contract and furthermore Perisai did not intend to take on any construction risk to rebuild it into a MOPU, hence, Perisai had decided to dispose of the rig in 2010.

The Target Company which Perisai is now buying, will own a MOPU(a facility which is used to process oil or gas in offshore locations) which is expected to have a certified 15-year life span and will be installed with major oil and gas processing equipment.

One of the conditions precedent to the Completion is the receipt of the charter payment from the major oil company. Perisai would only acquire the Target Company if the MOPU is operating and acceptable to the major oil company.

16) The Target Company is currently converting its used rig into MOPU and would be involved in the bareboat chartering business in the oil and gas industry. The Target Company's business prospects are dependent on the prospects of the oil and gas industry in Malaysia as well as the surrounding region.

In view of the positive prospects of the oil and gas industry and the demand for rigs by the oil and gas players, the Board believes that the prospects and future financial performance of the Target Group is expected to be favorable.

The Target Company’s revenue stream will be protected by the bareboat charter arrangement to be entered into with GEM for 2 + 1 + 1 years.

(b) Earning and EPS The Proposed Acquisition is expected to be completed by the third quarter of 2011 and is expected to contribute positively to the earnings and the EPS of Perisai Group for the financial year ending 31 December 2011 and in the future.

(c) Substantial shareholding of Perisai. Please refer to Appendix 1

18) There will be no major operational impact of the Proposed Acquisition on Perisai as GEL would lease the asset to GEM on the bareboat charter basis i.e the operation risk is being transferred to the charterer

19) Dato’ Dr Mohamed Ariffin bin Hj Aton is only a director of Gryphon Energy (M) Sdn Bdh. This transaction is not considered a Related Party Transaction pursuant to Paragraph 10.08 of the Main Market Listing Requirements.

20) Kindly refer to points (15) and (16) above. 21) The highest percentage ratio applicable to the Proposed Acquisition is 87.26%.

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There are several issues.

1. Why didn't Perisai make this detailed announcement in regards to its purchase of Garuda? Why wait until Bursa demand of information? Yes, why was this deal announced to the press on 30th March 2011 and why wasn't this deal announced on Bursa website?

2. The table snapshot shows that Perisai number of shares would expand greatly. Back in Jan, Perisai already announced its Intan Offshore acquisition. ( refer Perisai_Announcement _27 Jan.pdf ) For the purchase of Intan Offshore some 70,683,000 new shares would be issued at a price of rm 0.64 sen. For the purchase of Garuda some 92,307,692 new shares would be issued at a price of rm 0.65 sen.Which means at the end of the day, Perisai shares would balloon from 662,000,000 to 845,791,000 shares.

Not a fair comparison but just imagine that Perisai was trading around 58 sen at the start of the year. With a share base of 662 million, the company was valued at 383.960 million. The stock closed at 82 sen. If Perisai stays at this price, the 'new' Perisai would be be valued at some 693.5 million! (If one is an investor/shareholder, one would be worried with the possible dilution of earnings but then if one is a trader/speculator, one would not even bother! )

3. The Intan purchase. If you open the Jan.pdf file, you would note that..

• The principal activities of Intan Offshore are those of ship owners and provision of ship chartering services. Intan Offshore, together with its subsidiaries (“Intan Offshore Group” or “Group”) own a total of 8 vessels. The vessels are currently chartered as bareboat charters to Emas Offshore and Emas Offshore Pte Ltd (both wholly-owned subsidiaries of Ezra Holdings Limited (“Ezra Holdings”)) which in turn charters the vessels out to end charterers

Now Ezra Holdings the name is familiar.

Back on April 2010.

• Saturday April 10, 2010 MD of Perisai selling 19% stake
  
  PETALING JAYA: Perisai Petroleum Teknologi Bhd managing director Nagendran C. Nadarajah is disposing of his 19% stake in the company to HCM Logistic Ltd, a subsidiary of Singapore-listed Ezra Holdings Ltd. The company told Bursa Malaysia yesterday that the disposal was expected to be completed on or before May 7.

Nagendran sold his stake to HCM to Ezra Holdings. And Perisai is buying Intan Offshore from Ezra Holdings?

Nothing wrong in that.... but.... makes you wonder...

4. And how is Intan Offshore earnings track record? 5. What does Garuda brings to Perisai? I don't know but all I saw was just this statement.

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

Expected revenue of just USD25 million. My eyes might fail me but I did not see Perisai state how much earnings Garuda could bring to the company.

Ok, I am aware the following statement from CIMB.

• 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.

CIMB expects annual profit contribution of rm 40 million????

LOL! This is where I am confused.

If it's so good why didn't Perisai state this in its reply to Bursa?

But some would argue that Garuda's earnings is not improtant. The issue is the asset, the MOPU, that Perisai is buying!

6. The justification of the issue price at RM0.65 is based on an average price of Perisai shares at the point of initial negotiations?

Err... so what's the initial negotiation? How was the 65 sen price tag being justified? Can we have more info?

7. ".. the Target Company as at 31 December 2010, the Target Company has a Property Plant and Equipment book value of USD12.3 million and Total Assets of USD 13.6 million"

Err... the target company only has a property, plant and equipment book value of just USD12.3 million and total Assets of USD13.6 million?

So how is the USD 70 million purchase price being justified? Why must Perisai buy Garuda? No other alternative?

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Perisai Asked To Explain In Details Its Purchase Of Garuda Energy

Getting interesting!!

On Bursa website, it has been announced that Perisai had been rquested to furnish the investing market with the additional information in respect of their purchase of Garuda Energy (L) Ltd. ( refer to postings Perisai: Life Is Too Damn Good! and RHB Clarifies Its Statement On Perisai )

THE PROPOSED ACQUISITION BY PERISAI PETROLEUM TEKNOLOGI BERHAD ("PERISAI") OF 100% EQUITY INTEREST IN GARUDA ENERGY (L) LTD ("TARGET COMPANY") FOR A TOTAL PURCHASE CONSIDERATION OF USD70 MILLION TO BE SATISFIED BY WAY OF CASH AND THE ISSUANCE OF NEW ORDINARY SHARES OF PERISAI ("PROPOSED ACQUISITION") We refer to your Company's announcement dated 29 March 2011 in respect of the above matter. In this connection, kindly furnish Bursa Malaysia Securities Berhad ("Bursa Securities") with the following additional information for public release:-

1. The number of consideration shares to be issued.
2. The source of fund for the Proposed Acquisition and its breakdown.
3. The description of business carried on by Target Company.
4. The date of incorporation of Target Company.
5. The cost incurred by Target Company in converting Rubicone into a Mobile Offshore Production Unit.
6. The particulars of all liabilities, including contingent liabilities and guarantees to be assumed by Perisai arising from the Proposed Acquisition.
7. The names of Target Company's directors and substantial shareholders and their respective shareholdings.
8. The date Gryphon Energy (M) Sdn Bhd ("GEM") was awarded a contract to lease, operate and maintain a MOPU for a period of 2+1+1 years.
9. The basis in arriving at the expected revenue to be generated by GEM of approximately of USD25 million per annum .
10. The names of GEM's directors and substantial shareholders and their respective shareholdings.
11. Further clarification on the basis of arriving at the purchase consideration.
12. The justification for the issue price of RM0.65 per consideration share which is more than 10% discount of the current market price.
13. The details of the asset owned by the Target Company. 14. The original cost of investment and date of investment by the vendor in the Target Company.
15. Further clarification on the rationale for the acquisition of the Target Company from the vendor in view of the disposal of the Target Company to the vendor in 2010. 16. The details of the prospects of the Target Company. 17. The financial effects of the Proposed Acquisition including on earnings per share, net assets per share, gearing, share capital and substantial shareholding of Perisai.
18.The operational impact of the Proposed Acquisition on Perisai.
19. In view of the interest of Dato Dr. Mohamed Ariffin bin Hj Aton in the Proposed Acqusition as disclosed in the announcement, to clarify whether the transaction is a Related Party Transaction pursuant to Paragraph 10.08 of the Main Market Listing Requirements (" LR").
20. To also state the basis of the Board Directors’ recommendation to grant approval for Perisai to enter into the Term Sheet with the vendor (which material terms contained therein, shall be a binding agreement), taking into consideration the Board of Directors’ opinion as stated in Perisai’s announcement dated 10 May 2010 that the disposal of Garuda Energy (L) Ltd to Mr Nagendran Nadarajah was in the best interest of Perisai.
21. The highest percentage ratio applicable to the Proposed Acquisition pursuant to paragraph 10.02(g) of the LR.
22. All other relevant information as stipulated under Appendices 10A and 10C of the LR.

Please furnish Bursa Securities with your reply via an announcement within one (1) market day from the date hereof.

Yours faithfully
SUZALINA HARUN
Head, Issuers Listing Division Regulation

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