April 19, 2010

Good start for Kencana's marine charter

Kencana Petroluem Bhd
(April 16, RM1.55)
Maintain buy at RM1.56 with fair value at RM2
: We believe that investors should continue to ride with the upcycle in oil and gas (O&G) contract flows, as Kencana remains one of our preferred exposures to this sector.

Kencana's wholly-owned Kencana Nautilus Sdn Bhd together with logistic provider Yinson Marine Services Sdn Bhd have secured a service contract for provision of offshore support vessel in Vietnam. The contract includes providing an offshore support vessel to service drilling rigs, offshore installations, derrick barges, diving vessels and other crafts, including anchor-handling services off the coast of Vietnam.

The project owner and end user of the vessel is Petronas Carigali Vietnam Ltd, an O&G joint-venture operating company based in Ho Chi Minh City. The contract, awarded for one year with an option to extend for another year, is valued at RM33 million.

We understand that Kencana may be utilising its second deepwater-capable vessel, Gemia, for this project. Gemia, which cost RM79 million, was built by Nam Cheong dockyard. The vessel, with an engine capacity of 8,080bhp, was delivered on Jan 15 this year.

We estimate that the charter rate works out to US$2.50/bhp (RM8), which is 40% higher than the average rate of US$1.75/bhp, the rate that Tanjung Offshore secured for five of its anchor handling tug supply vessels for Malaysia-based projects since the beginning of the year.

Even with Gemia's deepwater capability, the rate appears higher than what Ezra Holdings secured recently. In fact, the rate appears to rival the market's peak in early 2008.

We are excited by the strong charter rate - it would seem that the weakness in the offshore support service market has bottomed out.

Kencana's first vessel, the 5,220bhp KPV Kapas, is still on spot charter rate offshore Terengganu and the South China Sea. But this vessel should be able to secure a long-term contract soon as the market is in recovery phase.

The stock currently trades at an attractive CY2010F PE (price-to-earnings) of 17 times, way below its 2007 peak of 25 times. We remain confident that upcoming news flow will elevate market capitalisation of more visible O&G stocks to even higher levels. - AmResearch, April 16
This article appeared in The Edge Financial Daily, April 19, 2010.

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