Excerpts from UOB Kay Hian report
Analyst: Llelleythan Tan
| Near First Oil Production, Backed By Huge Cash War Chest And Assets Rex has proven its ability to create substantial value from its recent divestment of two Norwegian assets to Lundin for US$45m and its remaining assets could be worth more vs its book value.
Also, Rex has a strong net cash of S$89.5m, or 41.5% of its market cap. Initiate coverage with BUY and SOTP-based target price of S$0.218, implying 1.1x 2020F P/B. |
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WHAT’S NEW
• We initiate coverage on Rex International Holding (Rex).
INVESTMENT HIGHLIGHTS
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• Deeply undervalued given first oil prospects and strong balance sheet. Boosted by the recent Rolvsnes transaction, Rex boasts a strong net cash balance of S$89.5m.
Rex targets to achieve first oil in Oman by 1Q20 and we expect a strong cash inflow of S$51.6m in 2020 if it is successful.
Rex also owns three valuable concessions in Norway, where an oil discovery at two of the exploration assets would unlock huge value for Rex, while the third (the Shrek prospect) has recently discovered oil.
• Targeting first oil production in Oman by 1Q20. Rex owns a 92.7% direct stake in the Block 50 Oman concession and first production could bring in revenue of US$71.7m/year on average, assuming average production of around 5,000 bpd for five years. 
Bull Papua, an oil tanker, will store up to 750,000 barrels of oil produced during the early appraisal phase at the Oman oilfield.
Photo: marinetraffic.com
Rex has a recoverable cost pool of about US$100m, of which 65% could be offset with oil revenue.
Also, the Oman Oil Company has an option to buy 25% of Rex’s interest in Block 50 Oman, potentially increasing its net cash balance further for capital recycling.
• Proven track record in divestment of Norwegian assets. Rex has a track record in monetising its discovery assets.
In 1Q19, Rex divested its interests in two assets for US$45m, realising a gain of around US$30m. Rex still owns three assets in Norway, which are worth an estimated US$20.7m on its balance sheet.
Depending on the discovery of oil, the Norwegian assets could be worth a lot more than its estimated current book value of US$20.7m.
• Substantial cash from divestments and annual tax Incentives. Norway is a very supportive country for oil exploration as the government provides 78% cash-back for all exploration expenditure annually, regardless of whether oil is found. The cash refund would be paid out in November/December in the following year.
According to Rex’s 2018 annual report, Rex is due to receive a cash tax rebate of US$29.1m in Nov 19; this has been included in its trade and other receivables account and further increases Rex’s net cash position for 4Q19.
By continuing its exploration activities in Norway, Rex is able to use the tax rebates to de-lever its balance sheet or recycle capital for more exploration activities, ensuring a fundamentally strong balance sheet.
EARNINGS REVISION/RISK
• Surge in revenue and profitability from the start of oil production. We forecast strong revenue numbers for Rex from 2020 onwards, largely due to the expected commencement of production drilling in Oman.
Revenue forecasts for Oman are roughly at an average of US$71.7m/year.
For 2019-20, our revenue estimates are US$0.5m, US$144.0m and US$86.8m, and net profit estimates at US$20.3m, US$52.5m and US$12.5m respectively.
| VALUATION/RECOMMENDATION • Trading at 0.8x 2020F P/B, with net cash balance forming 41.5% of market cap. Initiate coverage with BUY and SOTP-based target price of S$0.218, implying 1.1x 2020F P/B. Rex is trading at 0.8x 2020F P/B, below its long-term average of 1.0x P/B and relatively low vs the industry’s 1.3x 2020F P/B. As of 3Q19, NAV/share stood at US$0.116 (S$0.156). • Rex still owns many undervalued assets in its balance sheet that could unlock huge value for the company. We believe that revenue from the production of oil in Block 50 Oman coupled with the sale of the Norwegian discovery assets would help boost its NAV/share and narrow the P/B gap between Rex and its peers |
SHARE PRICE CATALYST
• Stronger-than-expected oil production volume from Oman.
• Discovery of good oil reservoirs in the Norwegian concessions.
• Surge in crude oil prices.
Full report here.