LFG: Strategic Joint Venture Poised to Drive Significant Future Earnings Growth

A significant strategic alliance has been forged, set to markedly boost future earnings for a key player in the energy services sector. The company has entered into a non-binding term sheet to establish a 51:49 jack-up rig joint venture, with an initial focus on deploying two jack-up rigs in Malaysia.

Partnership and Strategic Rationale

The partnership, formed with Petrovietnam Drilling (PVD), is a pivotal step in the company’s evolution, validating its strategic pivot beyond Offshore Support Vessels (OSVs) into higher-value upstream energy services. This move is supported by state-linked partners and aligns with a long-term ambition to become an ASEAN energy and power infrastructure enabler, exploring multi-year drilling and cross-border grid opportunities.

This collaboration represents a mutually beneficial arrangement. While PVD gains crucial market access within Malaysia through the partnership, the company leverages PVD’s specialized rig expertise to accelerate its expansion into the upstream sector. The JV is expected to be incorporated in Malaysia with a balanced governance structure.

Future Outlook and Financial Projections

Financial projections for the new venture indicate substantial growth. Assuming a progressive activation of one to six rigs between FY27F and FY34F, coupled with 87-99% utilisation rates and an annual 6% increase in day rates (from US$85,000/day to US$128,000/day), the joint venture is anticipated to contribute between RM31 million and RM270 million per annum to future profits. This implies a compelling five-year Compound Annual Growth Rate (CAGR) of 38%.

Furthermore, each additional rig brought into the group’s operational portfolio is projected to boost overall group earnings by 26% from FY27F onwards, fundamentally transforming the company’s earnings profile towards a multi-year cashflow trajectory. The joint venture is likely to commence operations by leasing or chartering-in rigs, which will help minimise initial capital expenditure and ensure a shorter payback period. Selective acquisitions of rigs will follow as attractive terms and stable cashflows are secured.

Analyst’s Recommendation

AmInvestment Bank maintains a “BUY” recommendation for the company, with a target price of RM3.00. This target price represents a significant upside of 51% from the current market price of RM1.99. The valuation is pegged to a blended Sum-of-the-Parts (SOTP) methodology, applying various PE multiples across its different segments including OSV, marine transport, energy services, and ASEAN power-infrastructure optionality.

The announcement of this joint venture is seen as de-risking the energy-services value embedded in AmInvestment Bank’s target price and strengthens the re-rating case towards energy-infrastructure multiples. The bank notes that it will revise its target price upon definitive Shareholder Agreement (SHA) execution and confirmed drilling contracts.