Brokers’ take: UOBKH downgrades Rex to ‘sell’, lowers target price to S$0.10
Jessie Lim
UOB Kay Hian (UOBKH) has downgraded its call on Rex International to “sell”. This follows the production and exploration oil company’s poor financial results for FY2022 and news of the group’s diversification plans, which it foresees may be of concern to investors.
As at July 2022, UOBKH had a “buy” rating on the stock with a price target of S$0.45.
The research house also slashed its target price to S$0.10 from S$0.45 previously, after lowering its FY2023 and FY2024 earnings estimates by 48 per cent and 54 per cent, respectively.
The revised target is now based on an asset-based valuation methodology, as UOBKH moves away from the discounted cash flow methodology that it traditionally uses to value similar companies. It is based on a 0.5 times price-to-book target multiple to reflect a mark-down in the company’s valuation, said UOB analysts in a report on Tuesday (Mar 21).
The downgrade and lower valuation come amid UOBKH’s lack of confidence in Rex’s ability to produce oil consistently.
To recap, Rex posted a loss of US$1 million for the full year of 2022 due to poor oil production performance, despite average oil prices jumping 42 per cent year on year.
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“We highlight that the company has disappointed the market in the past 12 to 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,” said UOBKH analysts.
While they note that Rex currently trades at an enterprise value-to-barrels of oil equivalent per day ratio that appears “attractive” to current oil prices, the analysts emphasised that Rex’s net profit does not appear to have any correlation to oil prices despite being in the core business of oil and gas.
“We calculate that the correlation of Rex’s net profit to the oil price (is) at 0.07, and thus investors looking for an ‘oil price play’ should look elsewhere,” they said.
Their waning sentiment on Rex is further exacerbated by the company’s recent acquisitions unrelated to its core business of oil and gas.
As the commercial drone company and medical technology company were both acquired through interested person transactions, UOBKH believes this could lead some investors to question Rex’s standards of corporate governance.
Shares of Rex were down 5.1 per cent or S$0.007 at S$0.13 as at 11.18 am on Tuesday.
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