Stock Name: KENCANACompany Name: KENCANA PETROLEUM BHD| Research House: UOB | Price Call: HOLD | Target Price: 2.50 |
Kencana Petroleum Bhd
(Oct 31, RM 2.59)
Maintain hold with raised target price of RM2.50 from RM2.44: We met up with Kencana Petroleum Bhd recently, and we are turning more positive on its earnings outlook. The targeted additional order book replenishment for FY13 is 25% higher than our forecast. More details shared on the risk sharing contract (RSC) revealed that downside is capped at a 12% unlevered internal rate of return (IRR).
1QFY12 results will incorporate three months' contribution from recently acquired Allied Marine & Equipment Sdn Bhd (AME). AME is expected to post higher-than-expected earnings.
Kencana will prospect for the next marginal field, only after the merger with SapuraCrest Petroleum Bhd, which is expected to be completed by 1Q12.
The Berantai gas field, we estimate, yields a minimum 12% unlevered IRR, through cost recovery via fabrication and engineering works done by Kencana for the marginal gas field. We also understand that the returns could go as high as 18% unlevered IRR if Kencana manages to meet the scheduled delivery time and expected production rates from the gas field. Peak production is expected in 2013.
Kencana's existing order book is valued at RM2.2 billion. The engineering, procuring and construction (EPC) segment accounts for more than 56% of its existing order book. Kencana has a tender book of RM10 billion and 50% to 60% of the tenders are in overseas international markets.
There are still 25 marginal field lines up and 10 are ready for development. Only two marginal fields, thus far, have been given out to Kencana-SapuraCrest and Dialog Group Bhd.
Other domestic projects in the pipeline include 22 new shallow water blocks and six deepwater blocks. Petronas has also allocated RM3 billion for maintenance and hook- up jobs over the next three years. Kencana is the biggest offshore maintenance and hook-up player in Malaysia.
Tender rigs fabricated by Kencana, the KM-2 and KM-3, will be completed on April 13 and July 13. One of the rigs will be reserved for jobs in Malaysia and the other overseas. The rigs have yet to be contracted out and bids usually take place when nearing completion.
Current debt to equity levels of 0.5 times is not alarming for an oil and gas services provider. Kencana is still in a net debt position despite having RM800 million in cash.
Kencana's gross profit margins have risen from just 11% to 25% in the last six years. Its margins, which are almost twice that of Malaysia Marine and Heavy Engineering, are attributable to better cost management and lower subcontracting requirements.
We raise our target price to RM2.50 from RM2.44, which is based on a 16 times price earnings multiple to FY12 earnings. Our entry price is RM2.10. The award of more marginal fields would boost Kencana's intrinsic value.
Kencana and SapuraCrest could be undertaking more M&A exercises after the merger. They are planning another major corporate exercise in three years. ' UOB Kay Hian Research, Oct 31
This article appeared in The Edge Financial Daily, November 1, 2011.
