Stock Name: KENCANA
Company Name: KENCANA PETROLEUM BHD
Kencana Petroleum Bhd
(Sept 22, RM 2.57)
Recommendation under review, currently buy with target price of RM3: Kencana was to release its 4QFY11 results yesterday. Prior to the release, we expect FY11 to be a record breaking year for Kencana as its net profit may exceed RM200 million for the first time (9MFY11: RM159.4 million). For 4QFY11, earnings growth is anticipated in mid single-digits. Full year performance is expected to be better than management guidance of at least 50% growth. In FY12, we expect Kencana's earnings growth to remain strong at an estimated +26.7% year-on-year. This is mainly supported by a sustained order book and RM40 million profit guarantee from the acquisition of Allied Marine and Equipment Sdn Bhd (AME).
Kencana announced that it is building two tender assisted drilling rigs (TADRs) worth US$145 million ((RM452) each. Construction is expected to be completed by 1QCY13. As we have assumed new job replenishment of RM1.2 billion per year for Kencana, we are making no change at the moment to our FY12 numbers on this new fabrication work secured. Kencana's current outstanding order book is estimated at about RM2.8 billion or equivalent to two times book-to-bill ratio. We believe this provides good earnings visibility to Kencana for the next two years.
Two new drilling rigs will boost future earnings. According to Rigzone data, the monthly average tender rig charter rate per day in August 2011 was US$131,000 (RM408,720) (+5.9% year-to-date). Recall, the charter rate for Kencana's first rig, KM-1, is about US$126,000 per day. Should drilling contracts be secured at the same rate in the future, we reckon each of the aforesaid rigs can contribute about RM150 million revenue and RM45 million pre-tax profit per year to Kencana. We have yet to factor in any potential earnings contribution into our forecast as no drilling contracts have been won yet.
We are keeping our target price of RM3 for Kencana, which is on par with the offer price for its merger deal. The target price implies 21 times 2012 price-earnings ratio, equivalent to 10% higher than its four-year historical average of 20.4 times. Expected total return is now more than 15% due mainly to the recent share price retracement.
We are reviewing our recommendation, taking into account that weaker market sentiment might: (i) drag down Kencana's valuation, pegged at the high-end of its historical average; and (ii) cap potential capital gains (as per our earlier expectation) from the future listing of Integral Key Sdn Bhd post-merger. This is despite Kencana's fundamental and earnings prospects still being intact. ' MIDF Research, Sept 22
This article appeared in The Edge Financial Daily, September 22, 2011.
Company Name: KENCANA PETROLEUM BHD
| Research House: MIDF | Price Call: BUY | Target Price: 3.00 |
Kencana Petroleum Bhd
(Sept 22, RM 2.57)
Recommendation under review, currently buy with target price of RM3: Kencana was to release its 4QFY11 results yesterday. Prior to the release, we expect FY11 to be a record breaking year for Kencana as its net profit may exceed RM200 million for the first time (9MFY11: RM159.4 million). For 4QFY11, earnings growth is anticipated in mid single-digits. Full year performance is expected to be better than management guidance of at least 50% growth. In FY12, we expect Kencana's earnings growth to remain strong at an estimated +26.7% year-on-year. This is mainly supported by a sustained order book and RM40 million profit guarantee from the acquisition of Allied Marine and Equipment Sdn Bhd (AME).
Kencana announced that it is building two tender assisted drilling rigs (TADRs) worth US$145 million ((RM452) each. Construction is expected to be completed by 1QCY13. As we have assumed new job replenishment of RM1.2 billion per year for Kencana, we are making no change at the moment to our FY12 numbers on this new fabrication work secured. Kencana's current outstanding order book is estimated at about RM2.8 billion or equivalent to two times book-to-bill ratio. We believe this provides good earnings visibility to Kencana for the next two years.
Two new drilling rigs will boost future earnings. According to Rigzone data, the monthly average tender rig charter rate per day in August 2011 was US$131,000 (RM408,720) (+5.9% year-to-date). Recall, the charter rate for Kencana's first rig, KM-1, is about US$126,000 per day. Should drilling contracts be secured at the same rate in the future, we reckon each of the aforesaid rigs can contribute about RM150 million revenue and RM45 million pre-tax profit per year to Kencana. We have yet to factor in any potential earnings contribution into our forecast as no drilling contracts have been won yet.
We are keeping our target price of RM3 for Kencana, which is on par with the offer price for its merger deal. The target price implies 21 times 2012 price-earnings ratio, equivalent to 10% higher than its four-year historical average of 20.4 times. Expected total return is now more than 15% due mainly to the recent share price retracement.
We are reviewing our recommendation, taking into account that weaker market sentiment might: (i) drag down Kencana's valuation, pegged at the high-end of its historical average; and (ii) cap potential capital gains (as per our earlier expectation) from the future listing of Integral Key Sdn Bhd post-merger. This is despite Kencana's fundamental and earnings prospects still being intact. ' MIDF Research, Sept 22
This article appeared in The Edge Financial Daily, September 22, 2011.
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