Kencana Petroleum - Stronger earnings prospects from merger BUY

-  We maintain our BUY call on Kencana Petroleum (Kencana) with an unchanged fair value of RM3.86/share, pegged to a CY12 PE of 22x the merged SapuraKencana Petroleum earnings. 

-  Kencana’s 1HFY12 net profit of RM170mil (+65% YoY) was generally within our expectations, accounting for 53% of our FY12F earnings of RM318mil. For comparison, 1HFY11 accounted for 46% of FY11 net profit. We maintain FY12FFY13F earnings and introduce FY14F net 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 declared an interim dividend. 

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

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

-  Around 40% of Kencana’s outstanding order book of RM3bil, which represents 1.5x FY12F revenue, stems from overseas such as that at Australia’s Wheatstone. But combined with SapuraCrest, the merged entity’s order book of RM13.5bil (2.5x CY12F revenue) is by far the largest in the oil & gas sector.

-  Given that Kencana’s yards are only half utilised currently, the group is well positioned to 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, both SapCrest and Kencana are jointly bidding for over RM1bil tenders for engineering, procurement, construction, installation and commissioning (EPCIC) projects in Southern China.

-  We continue to be positive on Kencana’s merger with SapuraCrest, which is expected to be completed by midMay this year. This stems from the enhancement of capability in securing larger orders and re-energising earnings growth momentum. Besides additional contract newsflow, the group is eager to secure two additional risksharing marginal field contracts, similar to Berantai, in which the merged entity will have a 50% stake. 

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

Source: AmeSecurities