UOB Kay Hian analysts Llelleythan Tan and Adrian Loh have downgraded their call on Rex International 5WH to “sell” with a reduced target price of 10 cents, from 45 cents previously.
In their March 21 report, Tan and Loh note that the company isn’t the “oil price play that we expected”. Despite average oil prices jumping by 42% y-o-y, the company barely broke even in the FY2022 due to its poor oil production performance. During the year, Rex’s revenue grew by 7.5% y-o-y to US$170 million ($226.8 million) due to the inclusion of oil liftings from the Brage Field in Norway. A 31% y-o-y increase in average oil prices in Oman’s Yumna Field also contributed to the higher yearly revenue, the analysts say.
“However, the strong oil prices seen in FY2022 were unable to offset the 189% y-o-y increase in production and operating expenses,” they point out. “As a result, the company recorded a loss at the patmi level and was materially below our expectations.” The Yumna Field also recorded a y-o-y decline in oil liftings due to production stoppages during the year.
Along with its less-than-stellar results, the company announced that it will be diversifying its business into two unrelated sectors, drone and medical technology (medtech). The diversification was conducted via interested party transactions (IPTs), which Tan and Loh see as a “double whammy”.
“In our view, of key concern are two of Rex’s recent acquisitions which could total US$8.2 million ($10.9 million) which raise questions about the company’s commitment to its oil & gas business. Importantly, these IPTs could lead some investors to question the company’s standards of corporate governance,” they write.
“These stakes were acquired from Rex’s substantial shareholders Dr Karl Lidgren and Hans Lidgren (as well as Dr Lidgren’s brother, Lars Lidgren) and involve a commercial drone company and a medical technology company focusing on cancer therapy,” they add.
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In its results, the analyst highlight that the company’s net profit to the oil prices have a very low correlation at 0.07x, based on their calculations. AS such, investors looking for an “oil price play” should “look elsewhere”.
They are also iffy about the technology behind the company’s Rex Virtual Drilling, which does not appear to have added any shareholder value since the company’s listing in 2013 at 50 cents.
“Over the FY2014 – FY2022 period, the company recorded cumulative net losses of US$72 million, with four out of the nine years being profitable,” write Tan and Loh.
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The analysts have also lowered their estimates estimates for the Fy2023 and FY2024 by 48% and 54% respectively on the back of the poor production performance from Rex’s current fields.
“We highlight that the company has disappointed the market in the past 12 - 18 months due to its poor track record of maintaining a consistent level of oil production. This has been frustrating for investors given that this has occurred during a period of high oil prices,” they write.
On their new target price, the analysts note that it was calculated based on an asset-based valuation methodology instead of the traditional discounted cash flow (DCF) methodology that they traditionally use to value upstream oil companies. The reason behind their change in methodology is due to their “limited confidence” in Rex’s ability to produce its oil consistently and thus its earnings.
“As a result, our new target price is based on a target 0.5x P/B multiple as we mark down the company’s valuation due to its inconsistent oil production and IPT-related corporate governance issues which, in our view, detracts from the company’s oil assets which could generate decent cash flow,” they write.
“Rex has a net cash position of 2.5 cents per share which represents nearly one-fifth of the company’s current share price. In addition, Rex currently trades on an EV/boe (or enterprise value per flowing barrel) of US$9.67 per barrel which appears attractive relative to current oil prices,” they add.
