SINGAPORE (Dec 16): UOB Kay Hian is initiating coverage of Rex International Holding (Rex) with a "buy" and a target price of $0.218, or 1.1 times 2020 book value.

That's because Rex has proven its ability to create substantial value from the recent sale of two Norwegian assets for US$45 million ($61 million), realising a gain of around US$30 million.

In Norway, Rex still owns three assets which are worth an estimated US$20.7 million on its balance sheet. If oil is discovered, the Norwegian assets could be worth a lot more than its estimated current book value, says analyst Llelleythan Tan in a recent report.

According to Tan, Norway is a very supportive country for oil exploration as the government provides 78% cashback for all exploration expenditure annually, regardless of whether oil is found.

In its 2018 annual report, Rex says it is due to receive a cash tax rebate of US$29.1 million in November 2019 which 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," says Tan.

Elsewhere in the Middle East, Rex owns a 92.7% stake in the Block 50 Oman concession and first production could bring in revenue of US$71.7 million per year on average, assuming average production of around 5,000 bpd for five years.

"Rex targets to achieve first oil in Oman by 1Q20 and we expect strong cash flow if production drilling is successful," says Tan.

Rex has a recoverable cost pool of about US$100 million, 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.

Meantime, Tan is forecasting strong revenue numbers for Rex from 2020 onwards, largely due to the expected start of production drilling in Oman with revenue to come in at an average of US$71.7 million per year.

For 2019-20, Tan is estimating revenues of US$0.5 million, US$144.0 million and US$86.8 million and net profits of US$20.3 million, US$52.5 million and US$12.5 million respectively.

In addition, Rex has a strong net cash of $89.5 million, or 41.5% of its market cap.

On Monday, shares in Rex closed at 18.8 cents, or 0.8 times FY2020 book.

This is below its long-term average of 1.0 time book and relatively low compared to the industry’s 1.3 times book, adds Tan.