BUY Kencana Petroleum : Rising margins, bright order prospects
We maintain our BUY call on Kencana Petroleum Bhd with an unchanged fair value of RM3.40/share, pegged to an FY12F PE of 22x.
This follows another strong quarter of earnings delivery. Kencana’s 9MFY11 net profit of RM159mil (+69% YoY) was slightly above expectations, accounting for 76% of our earlier FY11F net profit of RM210mil and street estimate of RM211mil. We have raised our FY11F earnings by 4% due to a 1ppt-increase in fabrication EBIT margin to 18%. But FY12F-FY13F earnings are maintained on unchanged fabrication margins of 19%. Hence, Kencana’s fair value, pegged to FY12F earnings, is likewise unchanged.
below: KENCANA Petroleum Earning Summary (click to enlarge view)
Since the beginning of the year, Kencana has secured RM787mil worth of fresh contracts, including an estimated RM200mil EPC works for the Berantai marginal field – for which the group has a 25% equity stake in the risk-sharing contract. The group’s order book prospects are still bright, given Petronas’ spending programme of RM300bil over the next five years, which include enhanced oil recovery and marginal field jobs. We understand that Kencana may be involved in the bidding of two other marginal fields later this year. There is also M&A excitement as we expect additional joint ventures for Kencana in offshore construction services following the group’s proposed RM400mil acquisition of subsea service provider Allied Marine & Equipment Sdn Bhd. The stock currently trades at an attractive FY12F PE of 18x, below its 2007 peak of 25x.