Stock Name: KENCANA
Company Name: KENCANA PETROLEUM BHD
Research House: RHB
Kencana Petroleum Bhd
(May 4, RM1.58)
Reiterate outperform at RM1.58 with target price of RM1.88: Kencana announced on May 3 that it had received a letter of award from Saipem S A (an oil and gas service provider) for the fabrication of LNG jetty and marine structures for the Gorgon LNG project. The contract is worth RM166 million and is expected to be delivered in stages between 2Q11 and 3Q12.
Recall in our note dated April 15, we highlighted that the company is in the final stage of negotiations for three sizeable contracts (two from Malaysia and one from overseas), which are collectively worth RM400 million. Hence, we expect Kencana to announce two more sizeable contracts worth around RM240 million in the near term. In addition, Kencana expects to secure around RM600 million-RM800 million contracts under the PSCs' direct assignment by 4Q2010.
Kencana is currently tendering another RM4 billion worth of orders, which include fabrication contracts in Malaysia, Myanmar, Vietnam and India as well as for the long-awaited Sabah Oil & Gas Terminal.
With the upgrade in the Lumut yard (tonnage handling capability increased to 30,000 tonnes from 20,000 tonnes previously) nearing completion, we believe Kencana stands a good chance of securing higher-margin deepwater jobs. In tandem with the growing order book, we highlight that FY11-FY12 utilisation rate is expected to increase to 85% and 92% respectively from the estimated 45%-55% in FY10.
The risks to our view are: (1) contracts in overseas markets that may have higher execution risk; (2) rising steel cost and other cost overruns; (3) the strengthening of ringgit against the US dollar; and 4) contracts' cancellation/deferment if crude oil price pulls back.
No change to our forecasts as we have already assumed RM1 billion-RM1.3 billion new orders per annum flowing in over the next 24 months to replenish existing ones.
We continue to like Kencana given its: (1) proven earnings track record; (2) strong management; and (3) plans to diversify into more recurrent earnings. We believe the company's earnings visibility will continue to improve on the back of a revival in exploration and production (E&P) spending after recent delays, and driven by the continued long-term shortage of E&P assets.
We therefore reiterate our outperform recommendation on Kencana with an unchanged fair value of RM1.88 per share (based on 16 times FY11 price-earnings ratio). - RHB Research Institute, May 4
This article appeared in The Edge Financial Daily, May 5, 2010.
Company Name: KENCANA PETROLEUM BHD
Research House: RHB
Kencana Petroleum Bhd
(May 4, RM1.58)
Reiterate outperform at RM1.58 with target price of RM1.88: Kencana announced on May 3 that it had received a letter of award from Saipem S A (an oil and gas service provider) for the fabrication of LNG jetty and marine structures for the Gorgon LNG project. The contract is worth RM166 million and is expected to be delivered in stages between 2Q11 and 3Q12.
Recall in our note dated April 15, we highlighted that the company is in the final stage of negotiations for three sizeable contracts (two from Malaysia and one from overseas), which are collectively worth RM400 million. Hence, we expect Kencana to announce two more sizeable contracts worth around RM240 million in the near term. In addition, Kencana expects to secure around RM600 million-RM800 million contracts under the PSCs' direct assignment by 4Q2010.
Kencana is currently tendering another RM4 billion worth of orders, which include fabrication contracts in Malaysia, Myanmar, Vietnam and India as well as for the long-awaited Sabah Oil & Gas Terminal.
With the upgrade in the Lumut yard (tonnage handling capability increased to 30,000 tonnes from 20,000 tonnes previously) nearing completion, we believe Kencana stands a good chance of securing higher-margin deepwater jobs. In tandem with the growing order book, we highlight that FY11-FY12 utilisation rate is expected to increase to 85% and 92% respectively from the estimated 45%-55% in FY10.
The risks to our view are: (1) contracts in overseas markets that may have higher execution risk; (2) rising steel cost and other cost overruns; (3) the strengthening of ringgit against the US dollar; and 4) contracts' cancellation/deferment if crude oil price pulls back.
No change to our forecasts as we have already assumed RM1 billion-RM1.3 billion new orders per annum flowing in over the next 24 months to replenish existing ones.
We continue to like Kencana given its: (1) proven earnings track record; (2) strong management; and (3) plans to diversify into more recurrent earnings. We believe the company's earnings visibility will continue to improve on the back of a revival in exploration and production (E&P) spending after recent delays, and driven by the continued long-term shortage of E&P assets.
We therefore reiterate our outperform recommendation on Kencana with an unchanged fair value of RM1.88 per share (based on 16 times FY11 price-earnings ratio). - RHB Research Institute, May 4
This article appeared in The Edge Financial Daily, May 5, 2010.
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