RH Petrogas

UOBKayhian on 21 May 2014

FY14F PE (x): 81.8
FY15F PE (x): 39.3
RH Petrogas’s management announced yesterday that its controlling shareholders have
been approached by an investor regarding a potential takeover offer. No offer has been
made and investors who are not keen to take on more risks could consider taking some
profit. That said, we maintain our BUY recommendation as we see deep value in the
stock based on our valuation. Target price: S$1.35.

WHAT’S NEW
Takeover offer in the making? Yesterday, RH Petrogas (RHP) announced on SGX that
the company’s shareholders have been approached by an investor regarding a potential
takeover offer although no formal offer has been made yet. We are glad that the rally
reaffirms our investment thesis that there is deep value in the stock as its assets offer
much upside, especially its oilfield in China, Fuyu 1. We see significant value in its asset
in China, Fuyu 1. We believe that RHP’s share price could further re-rate significantly
if the overall development plan (ODP) for Fuyu-1, China is approved. Management will
immediately convert about 7mmboe of 2C resources to 2P reserves in the first phase of
its ODP. We currently value the oilfield at S$467.9m/S$0.64 a share based on our DCF
valuation. This forms 40.8% of our projected equity value for its concessions.
Maintain BUY with target price of S$1.35 based on NPV and risking model. We lower
our target price to S$1.35 from S$1.40 as we update our NPV and risking model to
incorporate RHP’s latest reserve and resource estimates coupled with its planned
capital expenditure. Our valuation is based on the NPV of the company’s current
production/near-production fields, plus risked estimates of its 2C resources and
prospective resources, less net debt adjusted for its committed capex. We still see more
value. As there is nothing concrete on the table currently, we advocate investors who
are not keen to take on more risks to take profit at this level as the stock has done very
well, returning 29.5% over the last one month. While we are excited with the deep value
the stock offers, the stock may de-rate if it is unable to secure the ODP for its oilfield in
China. Hence the stock may trade back towards S$0.60-0.70 if the takeover offer is off
the table, in our view.