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Monday, June 20, 2011

Energi Mega Persada - Highest earnings growth among Asian E&P

by UBS Securities

A turnaround story: first free cash flow, first positive net profit since 2007 We believe 2011 is a turnaround year for Energi Mega Persada (ENRG) and it will record strong continuous growth in 2012-13. We expect ENRG to post positive free cash flow for the first time ever this year due to an improved balance sheet and 28% net volume growth. ENRG will also post positive net profit for the first time since 2007 this year. We believe earnings will grow by 468% in 2012 and 114% in 2013.

Kangean gas project to double production volume in H112

Kangean gas project is the primary driver of a 107% increase in net production volume from 17k boepd in 2011 to 35k boepd in 2012. Japex, the operator of the field, guides for first gas flow in Q112. This project has been delayed for several years and we believe the market remains sufficiently pessimistic and many shareholders already assume one or two quarters of delay.

Refinancing could provide another catalyst

ENRG has a US$200m LIBOR + 12% loan that the company may refinance at any time. We believe ENRG will be able to obtain significantly lower interest cost if the company decides to refinance. For every 1% lower interest cost on this loan, our 2012 net profit forecast would rise by 3%.

Valuation: upgrade to Buy rating, raise price target from Rp260 to Rp270 We upgrade the stock from Sell to Buy rating. We raise our DCF-based price target by 4% to Rp270 on account of: 1) higher contracted gas price for Kangean gas (22%); 2) our lower WACC (6%) assumption; and 3) rights issue adjustment (-24%). Our price target implies 14x 2013E PE and 6.1x 2013E EV/EBITDX

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