Stock Name: KENCANA
Company Name: KENCANA PETROLEUM BHD
Research House: MIDF
Kencana Petroleum Bhd
(March 26, RM1.57)
Reiterate trading buy at RM1.59, target price raised to RM1.86: Earnings for the first half (1H) of the financial year ending July 31, 2010 (FY10) fell short of estimates, accounting for only 36.4% and 43% of ours and consensus' full-year estimate respectively. However, the second quarter (2Q) tends to be Kencana's weakest quarter.
Despite lower contract realisation, Ebit (earnings before interest and tax) margins were buoyed by favourable fabrication margins (on average higher than 15%) as most of the raw material costs, mobilisation expenses are passed down to its clients.
We believe management had implemented cost control measures as early as 1Q of calendar year 2009 to preserve earnings. Moving forward, we expect Kencana to lock in higher margin revenue derived from its marine segment which delivers high yields and constant income stream.
Order book replenishments were rather slow in 2H09. Nonetheless, we understand that the group is anticipating to be awarded several substantial projects in "smaller packets" in the near future. We believe the group will be in line with its annual targeted replenishment rates of at least RM1 billion per annum. The present order book is about RM1.7 billion comprising RM800 million from marine engineering, RM27.6 million from project management and RM827.2 million from Kencana Petroleum Ventures (KPV), the group's marine services division.
However, the current spare capacity may prove to be an advantage for Kencana as it is able to take on immediate new jobs.
There are possible immediate re-rating catalysts for Kencana. We understand that the group is in a solid position to win further fabrication contracts awarded by domestic PSC (production contract sharing) clients, which will warrant an earnings revision. This is also supported by the construction of anchor handling tug supply (AHTS) vessels and workbarges to provide steady income stream for its KPV segment and Petronas potentially awarding an estimated RM4 billion of new fabrication jobs. Kencana's spare capacity at its fabrication yard and solid track performance would be its biggest value propositions in bidding for jobs.
We reiterate our trading buy recommendation with an increased target price of RM1.86 (previously RM1.55 post-rights issue) based on 18 times price-to-earnings ratio (PER) of FY10, which is a 20% discount to its four-year PE average at 23 times.
We retain our FY11 numbers as we await the award of the forthcoming fabrication contracts which will have accretive effect on future earnings. Kencana is currently trading at 15.4 times earnings per share (EPS) 2010, within its four-year average PE of 13.9 times to 42.3 times. - MIDF Research, March 26
This article appeared in The Edge Financial Daily, March 29, 2010.
Company Name: KENCANA PETROLEUM BHD
Research House: MIDF
Kencana Petroleum Bhd
(March 26, RM1.57)
Reiterate trading buy at RM1.59, target price raised to RM1.86: Earnings for the first half (1H) of the financial year ending July 31, 2010 (FY10) fell short of estimates, accounting for only 36.4% and 43% of ours and consensus' full-year estimate respectively. However, the second quarter (2Q) tends to be Kencana's weakest quarter.
Despite lower contract realisation, Ebit (earnings before interest and tax) margins were buoyed by favourable fabrication margins (on average higher than 15%) as most of the raw material costs, mobilisation expenses are passed down to its clients.
We believe management had implemented cost control measures as early as 1Q of calendar year 2009 to preserve earnings. Moving forward, we expect Kencana to lock in higher margin revenue derived from its marine segment which delivers high yields and constant income stream.
Order book replenishments were rather slow in 2H09. Nonetheless, we understand that the group is anticipating to be awarded several substantial projects in "smaller packets" in the near future. We believe the group will be in line with its annual targeted replenishment rates of at least RM1 billion per annum. The present order book is about RM1.7 billion comprising RM800 million from marine engineering, RM27.6 million from project management and RM827.2 million from Kencana Petroleum Ventures (KPV), the group's marine services division.
However, the current spare capacity may prove to be an advantage for Kencana as it is able to take on immediate new jobs.
There are possible immediate re-rating catalysts for Kencana. We understand that the group is in a solid position to win further fabrication contracts awarded by domestic PSC (production contract sharing) clients, which will warrant an earnings revision. This is also supported by the construction of anchor handling tug supply (AHTS) vessels and workbarges to provide steady income stream for its KPV segment and Petronas potentially awarding an estimated RM4 billion of new fabrication jobs. Kencana's spare capacity at its fabrication yard and solid track performance would be its biggest value propositions in bidding for jobs.
We reiterate our trading buy recommendation with an increased target price of RM1.86 (previously RM1.55 post-rights issue) based on 18 times price-to-earnings ratio (PER) of FY10, which is a 20% discount to its four-year PE average at 23 times.
We retain our FY11 numbers as we await the award of the forthcoming fabrication contracts which will have accretive effect on future earnings. Kencana is currently trading at 15.4 times earnings per share (EPS) 2010, within its four-year average PE of 13.9 times to 42.3 times. - MIDF Research, March 26
This article appeared in The Edge Financial Daily, March 29, 2010.
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