Our meeting with management reaffirms our positive view on the company. Rex has added a new technology called the Rex Gas Indicator to its portfolio, which increases the attractiveness of Rex as a partner (covering both liquid and gaseous hydrocarbons) to other E&P companies. 1H15 oil production in Oman is still on track, which we understand may be 5,000-6,000 bopd.
The addition of RGI to its portfolio is expected to give Rex access to new markets (gas prospectivity market), increase the potential in existing and new portfolio as gas prospects can be added to the resource pool, and increase the attractiveness of REX as a partner to other E&P companies.
• Funded through 2015. With US$50m cash on hand, Rex is well funded for its current exploratory plans for the rest of 2014 and 2015.
• Selecting only the best concessions. In Jul 14, Rex’s jointly controlled entity, Lime Petroleum Norway (Lime Norway)), decided to drop three North Sea licenses- PL509S, PL 509 BS and PL509 CS, after analysing the concessions with its Rex Technologies.
We believe this shows the amount of caution Rex puts into the selection of its concessions. Selecting the best concessions from a large sample population, together with its RT, Rex claims an exploration success of more than 50%, as compared with the industry’s average of 10-15%.
Full UOB Kay Hian report here.
Recent story: REX INTERNATIONAL -- Buy, $1.19 target price, says SP Angel
Growth is possible if CE stabilises and new Industrial customer ramps up further
The weaker results were mainly dragged down by CE (-11% y-o-y), as its key customer switched strategy and is moving to the mass market with lower pricing and larger volume. Industrial sales, on the other hand, surged 36% y-o-y, compared to our 15% forecast. Unfortunately, Industrial’s outperformance failed to offset the decline from CE, leading to flat margins y-o-y. CE hit by customer’s strategy to enter mass market. 1Q net profit grew 2% vs consensus expectations of 9-10%.
Growth catalysts are visible but momentum is hard to predict. Firstly, further ramp up of new Industrial customer started in Q1 and new engagements could result in overall growth for the group and better margins.
Secondly, it remains to be seen if CE’s customer’s new strategy of lower prices could create meaningful demand from a larger addressable market in subsequent quarters. However, erring on the side of conservatism, we have cut FY15/16F earnings by 10-11% to account for lower CE contribution and flat margins. Accordingly, we lower TP to S$0.65, still pegged to 10x FY15F PE.
Still attractive at 3x PE net of cash, 6% yield and 58% potential upside. VALUE exited 1Q with net cash of HK$440m or S$0.19/shr. Based on our revised forecast, the stock remains inexpensive at 3.3x FY15F PE net of cash and 6% yield. Maintain BUY.