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Monday, July 20, 2015

Oil and Gas - SPAC (NOT RATED)

Highlights 

  • Certainty amid Uncertainty... Given the uncertainty on the external (Fed rate hike, oil price and China Slowdown) and internal issues (1MDB, political glitches, weak 2Q corporate earnings post GST), SPACs investment looks attractive by offering certain return (circa 13% per annum) to investors. We maintain our investment thesis that the gross trust value for SPACs should serve as the base value as investors can choose to votes against QAs and get back the cash value from trust account plus net interest earned.
  • Slow but Steady… Since our O&G – SPAC report dated in 10 Dec 14, Cliq and Sona’s share price has surged by 6.5% and 5% respectively, outperformed KLCI index (versus FBM KLCI fell 0.7%) and higher than FD rate.
  • Any upside for Sona and Cliq? … If refer to gross trust per share @ IPO, the upside for Sona and Cliq are only left with 3% and 7% respectively. However, if we included the interest earned since IPO, the latest gross trust per share for Cliq and Sona offers 9% and 11% respectively (Refer Fig 1).
  • Higher risk free returns than FD … For investors with longer term horizon, in the worst case scenario, holding to maturity will provides attractive return of 10-27% (after taken into account interest earn of 3.2% pa, 25% tax on interest and other expenses, Ref Fig 2). This will translate to ~13% risk free return p.a. which is significantly higher than average FD rate of 3.2% p.a.
  • Black Horse – Reach Energy… Among the three undergraduate O&G SPACs, Reach Energy is trading at highest discount of about 16% to its latest gross trust per share mainly due to longer maturity date (761 days left vs. Cliq – 269 days vs. Sona – 380 days). If Reach Energy manages to secure QA in near future, we expect the share price to trade at least close to its gross trust per share @ IPO (exclude any interest earned during the period) which should provide immediate return of 19%.
  • Weak oil price environment… SPACs are cash companies looking for oilfield assets and should potentially be able to negotiate for better pricing especially in the declining oil price envi ronment. However, transparent disclosure on the maturity date and cash available could disadvantage SPACs

Risks

  • Identification of qualifying asset takes > 3 year; Further market mispricing; Plunged in oil price.

Valuation

  • Share prices should be underpinned by cash backing per share. The current discount provides unique opportunity to lock in long term (<3 years) returns.
Source: Hong Leong Investment Bank Research - 20 Jul 2015

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