* Source of opportunity
We reiterate our CL-Buy; our new 12m PT of SKr52.6 implies 66% upside.
Despite lowering our TP to reflect the most punitive CGT scenario on assets
we deem to be strategic, we continue to believe the stock offers a
compelling risk/reward opportunity on M&A and exploration potential,
particularly given its recent underperformance. We believe Africa Oil offers
exposure to a strategic asset which has potential to obtain a premium
valuation. In a M&A scenario; excluding exploration, we estimate 58%
upside to the current share price even when modelling a CGT. We also see a
number of funded & potentially material exploration catalysts approaching.
* Catalyst
We are positive on Africa Oil’s frontier exploration activities in Kenya which
have the potential to unlock a new basin, resulting in significant ‘blue sky’
upside potential (valuation based on fully de-risking one basin implies c.98%
upside). We expect a key driver for the stock will be exploration success in
one of these basins given that, on our estimates, no risked value is currently
being ascribed to it by the market. We expect four frontier basins to be tested
by end 1Q15: Central Kerio, North Kerio, West Omo and North Turkana.
Despite the introduction of capital gains tax, we believe M&A remains a key
catalyst for the stock, particularly given its funding requirement from mid-
2015. We continue to see a potential sale of the company, an asset disposal, a
farm-down or equity placing as potential options.
* Valuation
Our 12-month SOTP-based price target decreases to Skr52.6 (from Skr61.8),
using a long-run oil price assumption of $100/bl. Within our SOTP, our
valuations of assets we deem to be strategic in nature include a 50% weighing
for M&A. These valuations are lower now as we incorporate a 37.5% capital
gains tax in our M&A valuations and make other minor adjustments.
* Key risks
Key downside risks include exploration/appraisal failure and lack of M&A.