Kencana Petroleum - Stronger earnings prospects from merger BUY

Stock Name: KENCANA
Company Name: KENCANA PETROLEUM BHD

Research House: AMMB

Price Call: BUY

Target Price: 3.86

-  We maintain our BUYcall on Kencana Petroleum (Kencana) with an unchanged fair value ofRM3.86/share, pegged to a CY12 PE of 22x the merged SapuraKencana Petroleumearnings. 

-  Kencana's 1HFY12net profit of RM170mil (+65% YoY) was generally within our expectations,accounting for 53% of our FY12F earnings of RM318mil. For comparison, 1HFY11 accountedfor 46% of FY11 net profit. We maintain FY12FFY13F earnings and introduce FY14Fnet profit with a growth of 17%, underpinned by a new order assumption of RM2.2bil(+10% YoY). But the results were slightly higher than general consensus,accounting for 59% of street estimate of RM287mil. As usual, the group has not declaredan interim dividend. 

-  The group's 2QFY12net profit was flat (+3% QoQ) at RM86mil, as the contribution from theacquisition of Allied Marine & Equipment had already been fully accountedfor in the previous quarter. Hence, the group's 2QFY12 pre-tax margin was flatQoQ at almost 20%.

-  Since the beginningof the year, Kencana has secured RM175mil new orders. But we understand thatthe group is already working on some projects for Murphy Oil, even though theletter of award has yet to be received. 

-  Around 40% ofKencana's outstanding order book of RM3bil, which represents 1.5x FY12Frevenue, stems from overseas such as that at Australia's Wheatstone. But combinedwith SapuraCrest, the merged entity's order book of RM13.5bil (2.5x CY12Frevenue) is by far the largest in the oil & gas sector.

-  Given thatKencana's yards are only half utilised currently, the group is well positionedto secure fresh orders with tenders valued at RM5bil-RM6bil, of which over 55%stems from Australia's huge offshore gas fields and the rest from Malaysia. 

-  Additionally, bothSapCrest and Kencana are jointly bidding for over RM1bil tenders forengineering, procurement, construction, installation and commissioning (EPCIC)projects in Southern China.

-  We continue to bepositive on Kencana's merger with SapuraCrest, which is expected to becompleted by midMay this year. This stems from the enhancement of capability insecuring larger orders and re-energising earnings growth momentum. Besidesadditional contract newsflow, the group is eager to secure two additionalrisksharing marginal field contracts, similar to Berantai, in which the mergedentity will have a 50% stake. 

-  The stock currentlytrades at an attractive CY12F PE of 16x, below its 2007 peak of 22x.

Source: AmeSecurities