Stock Name: KENCANA
Company Name: KENCANA PETROLEUM BHD
Research House: CIMB
Kencana Petroleum Bhd
(June 22, RM1.47)
Maintain outperform at RM1.50 with higher target price of RM2.15 (from RM1.90): Kencana has proposed to buy out Mermaid's shares in three jointly owned drilling units for US$66.6 million (RM213.2 billion). One of the target units is MKR1 which owns drilling rig KM1.
The deal is slated for completion in 1QFY10/11. Imputing the new earnings stream, we raise our FY11-12 EPS forecasts by 11.3-14.0% while retaining our FY10 forecast. Our target price rises from RM1.90 to RM2.15, pegged to an unchanged target market PER of 15 times. Kencana remains an outperform, with the potential share price triggers being 1) an active order book replenishment and 2) mergers and acquisitions.
The announcement was not entirely a surprise to us as management had hinted at the possibility of a sizeable acquisition in the drilling business during the May 20 analyst briefing. To recap, KMD is the operating unit for drilling activities while MKR1 is the rig owner. Kencana and Mermaid inked their JV agreements on Oct 22, 2007.
The acquisition price of US$66.6 million is fair. Also, we take a positive view of the proposed acquisitions because they will give Kencana total control of the drilling assets and provide an earnings boost. Furthermore, Kencana will be in a unique position as it will be involved in the entire process from fabrication (via Kencana HL) to drilling (via KMD) and asset ownership (via MKR1). For comparison, SapuraCrest Petroleum Bhd, which is currently Malaysia's biggest driller, owns and operates its five tender rigs on a JV basis with Norway-based Seadrill but does not fabricate them.
As at Jan 30, Kencana had net cash of RM333 million or 20 sen per share. Assuming a 50:50 split between borrowings and internally generated funds, we expect the drilling business, mostly through the deployment of KM1, to contribute a net profit of RM40 million in FY12. However, for FY11, we expect a net profit contribution of RM30 million as the deal is likely to be completed in 1QFY11.
We note that the proposed acquisitions will more than cover the earnings vacuum caused by Kencana's termination of its JV with Global Offshore. Before Kencana walked away from the JV, we had forecast an annual net profit contribution of RM15 million from the JV, inferior to the RM40 million that is expected from the main drilling units. ' CIMB Research, June 22
This article appeared in The Edge Financial Daily, June 23, 2010.
Company Name: KENCANA PETROLEUM BHD
Research House: CIMB
Kencana Petroleum Bhd
(June 22, RM1.47)
Maintain outperform at RM1.50 with higher target price of RM2.15 (from RM1.90): Kencana has proposed to buy out Mermaid's shares in three jointly owned drilling units for US$66.6 million (RM213.2 billion). One of the target units is MKR1 which owns drilling rig KM1.
The deal is slated for completion in 1QFY10/11. Imputing the new earnings stream, we raise our FY11-12 EPS forecasts by 11.3-14.0% while retaining our FY10 forecast. Our target price rises from RM1.90 to RM2.15, pegged to an unchanged target market PER of 15 times. Kencana remains an outperform, with the potential share price triggers being 1) an active order book replenishment and 2) mergers and acquisitions.
The announcement was not entirely a surprise to us as management had hinted at the possibility of a sizeable acquisition in the drilling business during the May 20 analyst briefing. To recap, KMD is the operating unit for drilling activities while MKR1 is the rig owner. Kencana and Mermaid inked their JV agreements on Oct 22, 2007.
The acquisition price of US$66.6 million is fair. Also, we take a positive view of the proposed acquisitions because they will give Kencana total control of the drilling assets and provide an earnings boost. Furthermore, Kencana will be in a unique position as it will be involved in the entire process from fabrication (via Kencana HL) to drilling (via KMD) and asset ownership (via MKR1). For comparison, SapuraCrest Petroleum Bhd, which is currently Malaysia's biggest driller, owns and operates its five tender rigs on a JV basis with Norway-based Seadrill but does not fabricate them.
As at Jan 30, Kencana had net cash of RM333 million or 20 sen per share. Assuming a 50:50 split between borrowings and internally generated funds, we expect the drilling business, mostly through the deployment of KM1, to contribute a net profit of RM40 million in FY12. However, for FY11, we expect a net profit contribution of RM30 million as the deal is likely to be completed in 1QFY11.
We note that the proposed acquisitions will more than cover the earnings vacuum caused by Kencana's termination of its JV with Global Offshore. Before Kencana walked away from the JV, we had forecast an annual net profit contribution of RM15 million from the JV, inferior to the RM40 million that is expected from the main drilling units. ' CIMB Research, June 22
This article appeared in The Edge Financial Daily, June 23, 2010.
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