IPO

Tuesday, June 30, 2020

FBMKLCI: 1,494.43
Sector: Oil & Gas
THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*

Reservoir Link Energy Berhad TP: RM0.27 (-34.2%)

Ace Market Listing
Well Services Contractor in Uncertain Times NOT RATED
Kylie Chan Sze Zan Tel: +603-2167 9601 kyliechan@ta.com.my www.taonline.com.my

Background 1 Share Information

Reservoir Link Energy Berhad (RLE) provides well services (Figure 1) to the 8 Listing Ace Market
O&G upstream industry. Its main offerings include: (1) wireline services, (2) Enlarged Share Capital (mn) 285.0
well services (e.g. perforation, leak repair, testing, wash & cement), and (3) O&G Market Cap @ RM0.41 (RM mn) 116.9

production enhancement and sand management solutions. Issue price (RM) 0.41
Oversubscription rate N/A
Estimated free float (%)
Figure 1: Revenue Breakdown by Service (FY19)

6% 3% Tentative Listing Dates

Opening of the IPO 25-Jun-20
15% Closing of the IPO 01-Jul-20
39%
Balloting of Applications 03-Jul-20
Allotment of Shares 13-Jul-20
Listing 15-Jul-20

17%
Ratio & Analysis
NTA per share (post IPO) (sen) 14.0
20% Price to NTA (x) 3.0
Proforma Gearing (x) 0.1
Well Perforation Well Leak Repair
Well Testing Wash & Cement Utilisation of Proceeds RM(mn) %
Wireline Services O&G Production Enhanacement
10.0 42.7
Purchase of Well Testing Equipment
Source: Prospectus Working Capital 4.9 21.0
Repayment of Bank Borrowings 5.0 21.3
IPO Statistic Listing Expenses 3.5 14.9
This IPO entails a public issue of 57.13mn new ordinary shares, and an offer TOTAL 23.4 100.0
for sale of 31mn shares at an IPO price of RM0.41/share (Figure 2). The
promoter’s entire shareholdings will remain under moratorium for 6 months
after IPO. The promoters comprise of RL Holdings, Dato’ Wan Hassan, Mad
Haimi, and Thien Chiet Chai with collective shareholding of 57.1% post-IPO
(Appendix 3). Thereafter, shareholdings amounting to 45% of enlarged share
cap will remain under moratorium for an additional 6 months. Following
expiry of the second 6-month period, the promoters may sell up to a
maximum of 1/3 annually (on straight line basis).

Figure 2: Share Allocation

Publc Issue to: No. of % of

Shares Enlarged
(mn) Capital
Malaysian Public 14.25 5.0
Eligible Directors, employees & persons 4 1.4
Placement to identified investors 38.88 13.6
Total 57.13

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Offer for Sale to: No. of % of

Shares Enlarged
(mn) Capital
Private Placement 2.5 0.9
Placement to Bumiputra (via private placement) 28.5 10.0
Total 31.0

Source: Company, TA Securities

Competitive Advantages
1. Decent track record in Well Perforation (since 2009)

Key Risks
1. Lack of revenue visibility and earnings volatility.
2. Weak O&G Industry Prospects

Business Overview
The bulk (FY19: 96.54%) of the Group’s revenue emanate from Malaysia.
Additionally, the Group has some exposure in Mauritania (FY19: 3.5%). RLE’s
main customers comprise of Production Sharing Contract (PSC) operators
(FY19 revenue contribution: 77%). Additionally, the Group also has dealings with
main contractors to PSC operators. RLE is heavily reliant on major client
Petronas (60% of FY19 sales). Other significant clients include Archer Malaysia
(8%), ExxonMobil E&P Malaysia (6%) and Roc Oil Sarawak (5%). RLE has 2
service centres in Kemaman, Terengganu and Labuan, Sabah. The latter is to
service the Kemaman Supply Base and Asian Supply Base respectively.

Figure 3: Core Services

Service Description Well Lifecycle
Well Leak Repair Seal leaks in wells via repair chemicals Start-Up /
Production
Well Perforation Create holes in well casing and tunnels in the surrounding reservoir Start-Up /
formation via shaped charges Production
Well Testing Collection of well data (eg. pressure and temperature, flow rates and Start-Up /
fluid samples) Production
Well Perforate, Wash & Part of well plug & abandonment (P&A) services. Wash & Cement is End-of-Life
Cement undertaken by partner, Archer Malaysia.
Wireline 1) Send wireline tools down wells to carry out well intervention and
collect data, and 2) Slickline and electric wireline services to connect Start-Up /
wireline tools to the surface Production
O&G Production Supply of Improved Oil Recovery (IOR) chemicals and sand
Enhancement management solutions to increase the amount of crude O&G
production from a reservoir Production
Source: Prospectus, TA Securities

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Utilisation of Proceeds
Estimated IPO gross proceeds of RM23.4mn is expected to be utilised as per
Figure 4. RLE intends to purchase well testing equipment to reduce reliance
on partner, Petrotechnical. Additionally, this will enable the Group to be a full
service provider for well testing. The total cost of the well equipment
(RM17.3mn) will be funded via a combination of IPO proceeds (RM10mn),
internal funds, and bank borrowings. To recap, back in Oct 2017, RLE and
Petrotechnical jointly secured an Umbrella contract awarded by Petronas for
well testing services. RLE currently pays Petrotechnical to partially supply
equipment and personnel needed to execute its portion of the contract.

Figure 4: Utilization of IPO Proceeds

Amount Timeframe
Utilisation of Proceeds
(RM mn) % (mths)
Purchase of Well Testing Equipment 10.0 42.7 24
Working Capital 4.9 21.0 12
Repayment of Bank Borrowings 5.0 21.3 6
Listing Expenses 3.5 14.9 Immediate
TOTAL 23.4 100.0

Source: Prospectus, TA Securities

Competitive Advantages
1) Decent Track Record
RLE has a decent operating track record since 2009, comprising: (1) well
perforation: 11 years, and (2) well services (i.e. wireline, perforation, leak repair,
testing, wash & cement): 3 years. The Group has 7 and 5 years of working
relationship with major clients Petronas and Roc Oil Sarawak.

Key Risks Relating to Business and Industry

1) Lack of revenue visibility
RLE’s current outstanding orderbook comprises mainly of 10 and 16 umbrella
and call-out contracts (tenure: 1-5 years) respectively. In FY19, 77% of RLE’s
revenue was derived from such contracts. There is a risk that RLE may not
secure actual work orders from this type of projects. As such, this would
result in orderbook risks and hence lack of revenue visibility. In the case of
umbrella contracts, the Group needs to compete with other pre-qualified
contractors. Whereas in the case of call-out projects, RLE will only be
contracted as and when required by the client. For instance, RLE has not
secured any work orders from Petronas’ umbrella contract (award: Feb-18) for
perforation, leak, repair & wireline (tenure: 2+2 years). Furthermore, only 2 out
of 10 umbrella contracts secured by RLE have been implemented, with the
rest pending commencement (Appendix 1 & 2).

2) Weak O&G Industry Prospects

Against the backdrop of volatile and subdued crude prices, oil companies,
including Petronas have announced major capex cuts. This is to conserve cash,
and to weather through any prolonged downturns. Recall that Petronas
recently announced capex cuts of 21% versus prior guidance. This implies
estimated revised capex of RM40bn (-16% YoY). Additionally, Petronas’ opex
cuts for FY20 amount to 12% versus its original budget. Meanwhile, IEA
expects upstream investment from oil companies to plunge 32% in 2020 to
USD335bn (previous guidance: USD490bn). The cuts will likely emanate from:
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(1) reduced activity, (2) new project delays, and (3) greater cost control.
Reduction in capex spend will result in lack of new projects and contract
awards. Therefore, this would lead to intense competition in an oversupplied
market. Against this gloomy backdrop, upstream service providers are at a
precarious situation. This is due to: (1) lack of orderbook replenishment, (2)
margin compression, and (3) low asset utilization.

3) Earnings Volatility
A smallish earnings base renders RLE vulnerable of slipping into losses if work
orders dry up. Conversely, when contract flows improve, profits could also
surge from a small base. Therefore, this results in erratic and volatile earnings
swings. This was reflected accordingly in the trough-to-peak oil price cycle in
2016-19. During this period, earnings turned around from FY16 losses to peak
profits in FY19 (Figure 5). Therefore, we are now wary that RLE is unable to
sustain its earnings momentum. This given the ongoing oil price slump in 2020
that would derail contract flows.

Figure 5: Historical Financial Performance

Revenue Gross Profit PAT

(RM mn)
90
80
70
60
50
40
30
20
10
0
-10 FY16 FY17 FY18 FY19

Source: Company, TA Securities

Earnings Forecast
Weaker FY20 earnings forecasts (Figure 6) are attributed to the Covid-19
pandemic which resulted in: (1) Malaysia: delay in two contracts, and (2)
Mauritania: suspension of Perforate, Wash & Cement contract from end-April
until further notice. Nevertheless, for the latter suspension, the earnings
impact is partially offset by compensation in the form of: (i) net upfront
payment of USD2.1mn, and (ii) monthly facilities rental reimbursement of
RM10k. Additionally, we also expect weaker work orders on the back of
slower domestic O&G activity. This is driven by Petronas’ announced 2020
capex cuts.

Flattish profit forecast in FY21 is mainly driven by subdued work orders from
RLE’s umbrella and call-out contracts. This is in-line with our expectations of
sustained capex cuts by Petronas in-lieu of sluggish oil price. Additionally,
bottomline decline is weighed by higher depreciation costs following the
planned purchase of well testing equipment. On the flipside, the latter is
expected to lead to margin improvement as RLE will no longer outsource
personnel and equipment from Petrotechnical. Lastly, for FY22, we anticipate a
recovery in contract awards. This is premised on expectations that the
industry down cycle would reverse its trajectory.

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Figure 6: Financial Projection

Revenue Core PATAMI PATAMI Margin

(RM mn)
90 16
80 14
70 12
60
10
50
8
40
6
30
20 4
10 2
0 0
FY18 FY19 FY20E FY21F FY22F

Source: Company, TA Securities

Valuation
RLE’s nearest comparable listed peers comprise of Uzma Bhd (SELL, TP: RM:
0.55) and Deleum Bhd (Not Rated). However, we understand that both players
are not involved in well perforation services. Recall that the latter comprises
RLE’s largest revenue contributor (FY19: 38%). At IPO price of RM0.41/share,
RLE is priced at CY21 P/E of 12.4x. This translates to more than double the
average CY21 peers’ valuation of 6.1x for Uzma (6.3x) and Deleum (5.9x).
We ascribe valuation of 8x CY21 P/E to arrive at a target price of RM0.27.
We believe the premium versus its competitors is justified by: (1) CY21 net
cash position, (2) superior average PAT margins of 12% in FY18-20E (peers:
4%-6%), and (3) impressive 3-year earnings CAGR of 224% in FY18-20E.
We are cautious of earnings risks for RLE stemming from: (1) orderbook
uncertainty as a large chunk of revenue is derived from umbrella and call-out
contracts, (2) weak outlook for contract awards on the back of Petronas’
capex and opex cuts and (3) earnings volatility and lack of revenue visibility
due to orderbook risks. RLE is Not Rated under our coverage.

Table 1: Earnings Summary (RM mn)

FYE Dec FY18 FY19 FY20E FY21F FY22F
Revenue 45.1 80.0 69.6 66.1 72.7
EBITDA 7.0 13.6 13.9 15.9 18.9
EBITDA margin (%) 15.6 17.0 20.0 24.0 26.0
Dep. & amortisation (1.5) (1.6) (2.7) (3.9) (5.4)
EBIT 5.6 12.1 11.3 12.0 13.6
Net finance costs (0.4) (0.5) (0.1) (0.2) (0.0)
EI 0.0 (0.3) 0.0 0.0 0.0
PBT 5.2 11.3 11.1 11.8 13.5
Taxes (1.3) (1.6) (1.7) (2.1) (2.7)
PATAMI 4.0 9.7 9.4 9.6 10.8
Core PATAMI 4.0 10.0 9.4 9.6 10.8
Core EPS (sen) 1.8 4.4 3.3 3.4 3.8
Core EPS Growth (%) >100 148.1 (24.4) 2.2 12.2
PE (x) 23.3 9.4 12.4 12.2 10.8
DPS (sen) 0.0 0.0 0.0 0.0 0.0
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

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Appendix 1: Umbrella Contracts

Source: Prospectus

[ TH E RE M A ININ G OF T H IS P A GE IS IN TE N TI O NA L L Y L E F T BL AN K]

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Appendix 2: Call-Out Contracts

Source: Prospectus

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Appendix 3: Shareholding Structure

Stock Recommendation Guideline

BUY : Total return within the next 12 months exceeds required rate of return by 5%-point.
HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point.
SELL : Total return is lower than the required rate of return.
Not Rated: The company is not under coverage. The report is for information only.
Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return
if dividend discount model valuation is used to avoid double counting.
Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium.

Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ 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.

As of Tuesday, June 30, 2020, the analyst, Wilson Loo, who prepared this report, has interest in the following securities covered in this report:
(a) nil

Kaladher Govindan – Head of Research

TA SECURITIES HOLDINGS BERHAD (14948-M)

A Participating Organisation of Bursa Malaysia Securities Berhad
Menara TA One 22 Jalan P. Ramlee 50250 Kuala Lumpur Malaysia Tel: 603 – 2072 1277 Fax: 603 – 2032 5048
www.ta.com.my

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