An improved performance. While the results announced by oil & gas (O&G) companies in Mar-May 09 were a mixed bag, they leaned towards the positive, unlike the previous quarter. A third of the six companies in our portfolio missed our forecasts, an improvement on 50% in 4Q08. Half of the companies broadly met our expectations (4Q08: 17%) and one (17%) surprised on the upside (4Q08: 33%). Since 1 May 09, the share prices of O&G stocks under our coverage have jumped by an average 28%, reflecting the overall encouraging reporting season. • Three trends in 1Q09. 1) Margins picked up as companies climbed the value chain: Except for Dialog, all the companies in our O&G portfolio showed margin improvement, with average EBIT margin rising from 14% in 4Q08 to 20% in 1Q09. 2) Late delivery remains a problem for offshore support vessel (OSV) operators: In total, Petra Perdana and Alam missed six vessel delivery dates due to assembly line congestion and delayed shipment of parts. 3) Petroleum retailers and refiners bounced back: The rising crude oil price supports the selling prices of products that are not subject to automatic pricing mechanism (APM) and refiners benefited from inventory gains. • Service providers stand to benefit. YTD, the oil price has jumped 56%, reflecting factors such as 1) a weakening US dollar, which encourages speculative money to flow into the market, and 2) an increased risk appetite among investors who anticipate an economic recovery. As a producing country, Malaysia is poised to benefit from the upward march of the oil price. Petronas-licensed service providers offering works and facilities such as yards, tank terminals, offshore structures and maintenance job stand to win the most. • Target price increases. There are no changes to our forecasts. However, we are raising our target prices by 11% for Dialog, Kencana, SapuraCrest and Wah Seong to reflect our recent index target upgrade. We now apply our revised target market P/E of 15x to the stocks, instead of 13.5x. Our target prices for Alam, Petra Perdana and Petronas Dagangan are maintained. • Kencana replaces Petra Perdana as top pick. YTD, Petra Perdana’s share price has risen by a whopping 120%, making the stock an outstanding performer in our oil & gas portfolio. While we still like the stock, we are replacing it with Kencana as our top pick. We believe Kencana’s newsflow and order book replenishment over the next few months will be more exciting. • Maintain OVERWEIGHT. We remain OVERWEIGHT on the oil & gas sector in view of the potential re-rating catalysts of 1) M&As, and 2) more active newsflow. Also unchanged are all our stock recommendations and earnings forecasts.
19
Please read carefully the important disclosures at the end of this publication. SECTOR UPDATE 9 June 2009 CIMB Research Report OVERWEIGHT Maintained Oil and Gas A slick 1Q09 performance MALAYSIA Norziana Mohd Inon +60(3) 2084 9645 - [email protected]• An improved performance. While the results announced by oil & gas (O&G) companies in Mar-May 09 were a mixed bag, they leaned towards the positive, unlike the previous quarter. A third of the six companies in our portfolio missed our forecasts, an improvement on 50% in 4Q08. Half of the companies broadly met our expectations (4Q08: 17%) and one (17%) surprised on the upside (4Q08: 33%). Since 1 May 09, the share prices of O&G stocks under our coverage have jumped by an average 28%, reflecting the overall encouraging reporting season. • Three trends in 1Q09. 1) Margins picked up as companies climbed the value chain: Except for Dialog, all the companies in our O&G portfolio showed margin improvement, with average EBIT margin rising from 14% in 4Q08 to 20% in 1Q09. 2) Late delivery remains a problem for offshore support vessel (OSV) operators: In total, Petra Perdana and Alam missed six vessel delivery dates due to assembly line congestion and delayed shipment of parts. 3) Petroleum retailers and refiners bounced back: The rising crude oil price supports the selling prices of products that are not subject to automatic pricing mechanism (APM) and refiners benefited from inventory gains. • Service providers stand to benefit. YTD, the oil price has jumped 56%, reflecting factors such as 1) a weakening US dollar, which encourages speculative money to flow into the market, and 2) an increased risk appetite among investors who anticipate an economic recovery. As a producing country, Malaysia is poised to benefit from the upward march of the oil price. Petronas-licensed service providers offering works and facilities such as yards, tank terminals, offshore structures and maintenance job stand to win the most. • Target price increases. There are no changes to our forecasts. However, we are raising our target prices by 11% for Dialog, Kencana, SapuraCrest and Wah Seong to reflect our recent index target upgrade. We now apply our revised target market P/E of 15x to the stocks, instead of 13.5x. Our target prices for Alam, Petra Perdana and Petronas Dagangan are maintained. • Kencana replaces Petra Perdana as top pick. YTD, Petra Perdana’s share price has risen by a whopping 120%, making the stock an outstanding performer in our oil & gas portfolio. While we still like the stock, we are replacing it with Kencana as our top pick. We believe Kencana’s newsflow and order book replenishment over the next few months will be more exciting. • Maintain OVERWEIGHT. We remain OVERWEIGHT on the oil & gas sector in view of the potential re-rating catalysts of 1) M&As, and 2) more active newsflow. Also unchanged are all our stock recommendations and earnings forecasts. Sector comparisons Target Core 3-yr EPS P/BV ROE Div Bloomberg Price price Mkt cap P/E (x) CAGR (x) (%) yield (%) ticker Recom. (Local) (Local) (US$ m) CY2009 CY2010 (%) CY2009 CY2009 CY2009 Alam AMRB MK B 1.59 1.84 224 8.1 7.6 12.9 1.7 21.0 0.6 Dialog DLG MK U 1.20 1.03 485 19.0 17.3 10.8 3.2 18.1 2.6 Kencana KEPB MK O 1.83 2.68 472 11.5 10.2 24.7 6.5 58.2 0.8 Petra Perdana PETR MK O 2.82 3.86 240 7.1 6.3 30.3 1.5 24.5 1.1 Petronas Dagangan PETD MK U 8.15 7.20 2,316 12.1 11.3 9.8 1.4 12.1 5.5 SapuraCrest SCRES MK O 1.52 2.07 552 13.6 11.0 23.8 2.3 15.9 3.9 Wah Seong WSC MK O 1.88 2.69 363 9.3 8.3 10.7 2.9 31.9 3.8 Simple average 11.5 10.3 17.6 2.8 26.0 2.6 O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy, B = Buy and TS = Trading Sell Source: Company, CIMB Research
Transcript
Please read carefully the important disclosures at the end of this publication.
• An improved performance. While the results announced by oil & gas (O&G) companies in Mar-May 09 were a mixed bag, they leaned towards the positive, unlike the previous quarter. A third of the six companies in our portfolio missed our forecasts, an improvement on 50% in 4Q08. Half of the companies broadly met our expectations (4Q08: 17%) and one (17%) surprised on the upside (4Q08: 33%). Since 1 May 09, the share prices of O&G stocks under our coverage have jumped by an average 28%, reflecting the overall encouraging reporting season.
• Three trends in 1Q09. 1) Margins picked up as companies climbed the value chain: Except for Dialog, all the companies in our O&G portfolio showed margin improvement, with average EBIT margin rising from 14% in 4Q08 to 20% in 1Q09. 2) Late delivery remains a problem for offshore support vessel (OSV) operators: In total, Petra Perdana and Alam missed six vessel delivery dates due to assembly line congestion and delayed shipment of parts. 3) Petroleum retailers and refiners bounced back: The rising crude oil price supports the selling prices of products that are not subject to automatic pricing mechanism (APM) and refiners benefited from inventory gains.
• Service providers stand to benefit. YTD, the oil price has jumped 56%, reflecting factors such as 1) a weakening US dollar, which encourages speculative money to flow into the market, and 2) an increased risk appetite among investors who anticipate an economic recovery. As a producing country, Malaysia is poised to benefit from the upward march of the oil price. Petronas-licensed service providers offering works and facilities such as yards, tank terminals, offshore structures and maintenance job stand to win the most.
• Target price increases. There are no changes to our forecasts. However, we are raising our target prices by 11% for Dialog, Kencana, SapuraCrest and Wah Seong to reflect our recent index target upgrade. We now apply our revised target market P/E of 15x to the stocks, instead of 13.5x. Our target prices for Alam, Petra Perdana and Petronas Dagangan are maintained.
• Kencana replaces Petra Perdana as top pick. YTD, Petra Perdana’s share price has risen by a whopping 120%, making the stock an outstanding performer in our oil & gas portfolio. While we still like the stock, we are replacing it with Kencana as our top pick. We believe Kencana’s newsflow and order book replenishment over the next few months will be more exciting.
• Maintain OVERWEIGHT. We remain OVERWEIGHT on the oil & gas sector in view of the potential re-rating catalysts of 1) M&As, and 2) more active newsflow. Also unchanged are all our stock recommendations and earnings forecasts.
O = Outperform, N = Neutral, U = Underperform, TB = Trading Buy, B = Buy and TS = Trading Sell Source: Company, CIMB Research
[ 2 ]
Background
In this note, we review the results announced in Mar-May 09 for Malaysian oil & gas companies under our coverage. As the companies have different financial year-ends, the results represent different quarters for different companies (Figure 1). There is no review of SapuraCrest’s (SCRES MK, Outperform) results as we started coverage of the stock in late Apr 09.
Figure 1: Financial year-ends
Company FYE Quarter under review
Alam Maritim Dec 1Q
Dialog Group Jun 3Q
Kencana Petroleum Jul 2Q
Petra Perdana Dec 1Q
Petronas Dagangan Mar 4Q
Wah Seong Dec 1Q
Source: Company
Results analysis
An improved performance The results were a mixed bag. However, unlike 4Q08, the performance leaned towards the positive. A third of the six companies in our portfolio missed our forecasts, an improvement on 4Q08’s 50%. Half of the companies broadly met our expectations (4Q08: 17%) while one (17%) surprised on the upside (4Q08: 33%) (Figures 2 and 3). This improved statistics mirror the companies’ performance against consensus estimates (Figure 2). Since 1 May 09, the share prices of O&G stocks under our coverage have jumped an average 28% (Figure 4), reflecting the overall encouraging reporting season. The average was pulled up primarily by earlier laggards and offshore support vessel (OSV) providers, Petra Perdana (PETR MK, Outperform) and Alam Maritim (AMRB MK, Buy). These two stocks were hammered for most of 1Q09 due to overplayed fears of falling charter rates, which had pushed their P/E valuations to as low as 2x despite their attractive double-digit growth. To recap, in our note dated 23 Jan 09, we argued that charter rates remained steady, supported by: 1) high demand and high charter rates for drilling rigs, 2) development of new fields, and 3) maintenance of existing platforms.
Figure 2: Companies’ performance vs. our and consensus forecasts, 1Q09
vs our forecast vs consensus
Above In line Below Above In line Below
Alam Maritim √ √Dialog Group √ √Kencana Petroleum √ √Petra Perdana √ √Petronas Dagangan √ √Wah Seong √ √
Source: CIMB Research
Figure 3: Companies’ performance vs. our forecasts, 4Q08-1Q09
0%
20%
40%
60%
80%
100%
4Q08 1Q09
AboveIn lineBelow
Source: Company, CIMB Research
[ 3 ]
Figure 4: Share price performance since 1 May 09
Stock Share price on Share price on Difference
1-May (RM) 8-Jun (RM)
Alam Maritim 0.935 1.59 70%
Dialog Group 1.09 1.20 10%
Kencana Petroleum 1.62 1.83 13%
Petra Perdana 1.77 2.82 59%
Petronas Dagangan 7.90 8.15 3%
SapuraCrest 1.15 1.52 32%
Wah Seong 1.70 1.88 11%
Average 28%
KLCI 990.74 1,072.85 8% Source: Bloomberg
Three trends in recent result season Looking within and beyond our coverage, we discerned three trends in the recent reporting season:
• Margins picked up as companies climbed the value chain. • Late delivery remains a problem for OSV operators. • Petroleum retailers and refiners bounced back.
Margin recovery
With the exception of Dialog (DLG MK, Underperform) which incurred higher operating costs at its overseas units, all companies within our coverage showed margin improvement with EBIT margin averaging at 20% in 1Q09, higher than 14% in 1Q08 (Figure 5). We believe yoy comparison is a better yardstick than qoq comparison due to seasonal factors. Wah Seong (WSC MK, Outperform) enjoyed the most margin enhancement, with EBIT margin rising from 4% in 1Q08 to 12% in 1Q09 (Figures 5 and 6). Its revenue dropped 15% yoy but shipment of pipes to the Sabah-Sarawak Gas Pipeline project and a pipe coating job in Turkmenistan helped to bolster margins. Alam had the second-highest margin jump, with EBIT margin escalating from 38% to 59%. The boost came largely from the reduction in third-party charters as the company expanded its own fleet. In 1Q09, Alam chartered only four vessels from third parties, down from a high of 12 in FY07. In comparison, Petra Perdana’s margin is lower, but still commendable, at 19% because it includes contribution from 60%-owned Petra Energy (PENB MK, Not Rated), whose maintenance and engineering operations carry lower margin than the parent company’s OSV business. Excluding Petra Energy, Petra Perdana’s margin from the OSV business stood at 34%. Kencana Petroleum’s (KEPB MK, Outperform) EBIT margin went up from 9% to 13% due to a higher contribution from the fabrication of the company’s first drilling rig KM1. Volume recovery and higher selling prices for products not subject to the automatic pricing mechanism (APM) led to an improvement in Petronas Dagangan’s EBIT margin from 4% to 5%.
Figure 5: EBIT margin comparison (%)
1Q08 1Q09 Comment
Alam 38 59 Less reliance on third-party charters
Dialog 10 8 Higher operating costs at overseas units
Kencana 9 13 More contribution from KM1 fabrication contract
Petra Perdana 18 19 Higher charter and utilisation rates
Petronas Dagangan 4 5 Volume recovery and higher selling prices for non-APM products
Wah Seong 4 12 Shipment of SSGP pipes and pipe coating works in Turkmenistan
Average 14 20
Source: Company, CIMB
[ 4 ]
Figure 6: EBIT margin comparison (%)
0
10
20
30
40
50
60
70
Alam Dialog Kencana Petra Perdana Petronas
Dagangan
Wah Seong
1Q08 1Q09
Source: Company
Late vessel delivery
Assembly line congestion and delayed shipment of parts, especially engines, were factors that led to the late delivery of vessels at Petra Perdana and Alam in 1Q09. During the quarter, Petra Perdana and Alam were supposed to have received two vessel and four vessels, respectively. Despite the absence of new vessels, both companies managed to show earnings growth in 1Q09 as existing fleets gained from steady charter and utilisation rates. At present, charter rates for 5,000HP AHTS vessels are about US$2.00/HP, higher than US$1.80/HP in early FY08 (Figure 7). Currently, Petra Perdana has a fleet of 19 OSVs (Figure 8) and is awaiting delivery of 14 new marine assets between now and Jul 10 (Figures 9 and 10). Meanwhile, Alam, which now runs 29 OSVs (Figure 11), will be adding 11 new marine assets to its fleet in FY09-10 (Figure 12).
3 Setia Aman Self-propelled accommodation 5,150 2Q09 188
4 Setia Deras UV 4,200 2Q09 80
5 Setia Kilas UV 4,200 2Q09 80
6 Setia Qaseh AHTS 5,150 3Q09 42
7 Setia Erat AHTS (DP1) 5,150 4Q10 42
8 Setia Perkasa AHTS (DP2) 12,180 2Q10 50
9 Setia Jati AHTS (DP2) 12,180 3Q10 50
10 Setia Iman AHTS (DP1) 5,150 3Q10 42
11 Setia Luhur AHTS (DP1) 5,150 4Q10 42
Total capacity (HP) 69,240
Average capacity (HP) 6,295 Source: Company
[ 7 ]
Petroleum retailers and refiners bounce back
Due to the swift drop in oil price in 4Q08 (Figure 13), companies in the downstream segment faced tougher challenges than the upstream players. To recap, pure refiner Shell Refining (SHELL MK, Not Rated) and refiner and retailer Esso (ESSO MK, Not Rated) slipped into net losses of RM330m and RM251m, respectively, in FY08. Pure retailer Petronas Dagangan posted only RM43m net profit in the Oct-Dec 08 quarter - the weakest quarterly number in recent years. The losses at Shell and Esso came mostly from inventory losses, a sharp reversal from the inventory gains that the companies had enjoyed in FY07 when the oil price was climbing. For Petronas Dagangan, the dive in the oil price in 4Q08 pushed down the selling prices of non-APM products although costs were much higher. However, the upturn of the oil price in 1Q09 (Figure 13) helped the refiners and retailers to recover. Petronas Dagangan has seen a rise in the selling prices of non-APM products, in addition to the normalisation of retail volume after record pump price increases on 5 Jun 08. The gradual increase in the oil price suggests that Shell and Esso are likely to book inventory gains in 2Q09.
Figure 13: Brent crude oil price, Jan 08 – Jun 09 ($US / barrel)
0
20
40
60
80
100
120
140
160
Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09
Source: Bloomberg
Outlook
Banking on green shoots of recovery. Year to date, oil price has jumped 56%, briefly breaking the US$70/barrel barrier on 5 Jun 09. This resurgence reflects factors such as 1) a weakening US dollar, which encourages speculative money to flow into the market, and 2) an increased risk appetite among investors who anticipate an economic recovery that could lead to a rebound in oil consumption. Earlier, on 28 May 09, OPEC decided to keep production quotas, a clear signal that it is betting on the oil price to rise as recession eases and demand for oil picks up. The subsequent market reaction suggests that OPEC’s calculation may be right. Oil price has since extended its gains to reach a fresh six-month high as the US reported signs of economic improvement, such as a drop in oil inventories and a slower pace of job cuts in May 09.
Proof of improving demand. In Malaysia, oil consumption has been stable (Figure 14). At the pumps, there is proof of firming demand after the record retail price increases on 5 Jun 08. After an 8% drop, retail volume normalised early this year, helping petroleum retailers such as Petronas Dagangan and Esso post improved 1QCY09 numbers after a disappointing 4QCY08.
[ 8 ]
Figure 14: Malaysia’s oil & condensate production and consumption, 1980-2008 (‘000 barrels per day)
Source: Petronas, Bank Negara, EIA
US$75-80/barrel by year-end? More forecasters are projecting a further upward
swing in the oil price. Last month, Saudi Arabia’s oil minister predicted that an economic recovery is “under way” and that oil price could hit US$75/barrel by year-end. Not content with the current price, OPEC oil ministers have repeatedly said they would like to see the oil price around US$80/barrel.
Significant brownfield investment. As a producing country, Malaysia is poised to benefit from the upward march of the oil price. An oil price above US$70/barrel has provided an incentive for producers, including Petronas, to step up the recovery of oil from brown fields. On 3 Jun 09, Petronas and ExxonMobil signed a production-sharing contract (PSC), sealing their commitment to at least US$2.1bn in spending to further develop seven existing oil fields off Peninsular Malaysia. The cooperation calls for both parties to undertake oil recovery activities through development and drilling, and rejuvenate the facilities in the seven fields. The objective is to sustain the current production level of Tapis crude blend. The fields are Seligi, Guntong, Tapis, Semangkok, Irong Barat, Tabu and Palas. Brown fields are matured fields which are still producing while green fields are new ones. ExxonMobil has invested more than US$15bn in Malaysia over the past 40 years. It operates 43 platforms in 17 fields offshore Trengganu. ExxonMobil has a working interest in six PSCs with Petronas.
Service providers stand to benefit. Petronas’s US$2.1bn PSC with ExxonMobil is part of the national oil company’s expected US$6.7bn capex allocation for CY09 (Figure 15). This large-scale investment suggests that Petronas and its production-sharing contractors will need a lot of equipment and structures, both upstream and downstream, to get the projects going. The beneficiaries are service providers providing a myriad of works and facilities:
• Yards: Yard availability is crucial to improving the supply network. It is the race for space that is driving Sime Darby’s (SD MK, Trading Buy) proposed acquisition of Ramunia (RH MK, Not Rated). Sime Darby’s Sime Engineering and Ramunia are among seven Petronas-licensed fabricators for offshore structures. The others are Kencana, Boustead Heavy Industries Corp (BHIC MK, Not Rated), Brooke Dockyard, MISC’s (MISC MK, Underperform) Malaysia Marine and Heavy Engineering and Oilcorp (OILC MK, Not Rated). Kencana is enjoying a healthy order book of RM1.9bn (Figure 16) and is now gunning for RM500m worth of fabrication contracts each in Malaysia and India.
• Tank terminals: Dialog is the undisputed tank terminal player and is the only Malaysian oil & gas company that has a direct JV with Petronas. Through a 40:30:30 partnership, Petronas, Dialog and Vopak Penjuru jointly own Kertih Terminal Sdn Bhd, which holds a 20-year concession to operate a tank terminal in Kertih. The terminal is now in its 10th year of operations. Currently, Dialog is building a tank terminal in Tanjung Langsat, Johor and is in talks with the Johor state government to build a new terminal in Pengerang, also in Johor.
• Offshore assets: Pipe laying barges, drilling rigs, OSVs and floating production, storage and offloading (FPSO) vessels are among offshore assets that are owned by Malaysian companies. Leading the pack is SapuraCrest with the ownership of Malaysia’s first deepwater pipe laying barge Sapura3000 (JV with Acergy) and five drilling rigs (JV with Seadrill). The Sapura3000 has been enjoying a high demand locally and regionally while the five rigs are on long-term charter contracts (Figure 17). Currently, SapuraCrest’s current jobs are worth a record RM7.9bn, which is the highest in the sector. Installation of pipelines and facilities and drilling contribute 87% to the order book (Figure 18). Another company with drilling rig ownership is Kencana, which is building the US$136m KM1 (JV with Mermaid) at its yard in
0
200
400
600
800
1,000
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Production Consumption
Net production
[ 9 ]
Lumut. The construction of KM1 is expected to be completed by Oct 09, after which the rig will deployed to Petronas for a 5-year contract, which works out to about US$130,000/day. KM1 as well as SapuraCrest’s T9 and Teknik Berkat are enjoying drilling charter rates that are above the global average of US$107,000/day (Figure 19). Another offshore asset category is FPSO where MISC and M3nergy (TGY MK, Not Rated) have a presence. Wah Seong fabricates gas compressors which are used on FPSOs. As for OSVs, other players apart from Petra Perdana and Alam are Tanjung Offshore (TOFF MK, Not Rated), Dayang Enterprise (DESB MK, Not Rated), Sealink (SEAL MK, Not Rated), Vastalux (VAST MK, Not Rated) and Bumi Armada.
• Maintenance. Chunky maintenance contracts can keep companies busy for at least three years. Last year, Petra Energy clinched a RM1.1bn Shell maintenance project (packages A and C) while SapuraCrest landed package B of the same project worth RM700m. The project calls for the maintenance of Shell’s offshore structures, i.e. platforms. On land, there are maintenance projects to be secured too. Dialog is the main player in this segment and has serviced Petronas, Shell and Conoco plants all over Malaysia with contracts that are renewed on a yearly basis, giving the company steady income.
Figure 15: Largest capex jumps among global oil & gas producers^
Minimum charter rateAv erage charter rateMax imum charter rate
Source: Rigzone
Valuation and recommendation
Maintain OVERWEIGHT. As 1Q is typically a weak quarter, we expect the performance of most companies in our oil & gas portfolio to improve as the year progresses. The rising oil price provides further impetus to order book growth. We remain bullish on the oil & gas sector, anchored by growing order books and prudent management.
11% target price increases. Following our strategy update on 2 Jun 09 and the upgrade in our index target basis from 13.5x forward P/E to 15x, we raise our target prices for Dialog, Kencana, SapuraCrest and Wah Seong by 11%. Note that our stock recommendations are unchanged. We maintain our target prices and keep a 20% discount to the 11x target P/E in the valuations of OSV players Petra Perdana and Alam given the risk of late vessel delivery, which was still prevalent in 1Q09. Even so, based on our valuations, there is still sizeable upside to our target prices of both stocks. We also maintain a 10x target P/E for downstream player Petronas Dagangan, whose illiquidity and low beta are likely to continue to limit investors’ interest in the stock. Our earnings forecasts for all seven stocks are unchanged. Figure 20 summarises our target price changes.
• Dialog’s target price was raised by 11% from RM0.93 to RM1.03 in our note dated 5 Jun 09 after we upped our P/E valuation from 13.5x to 15x. No change in UNDERPERFORM call.
• Kencana’s target price is revised upwards by 11% from RM2.41 to RM2.68 as we attach a higher 15x forward P/E (previously 13.5x). Retain OUTPERFORM.
• SapuraCrest’s target price is increased by 11% from RM1.87 to RM2.07 as we scale up our P/E valuation from 13.5x to 15x. Our OUTPERFORM call is intact.
• Wah Seong’s target price is upped by 11% from RM2.42 to RM2.69 as we peg a higher 15x forward P/E (previously 13.5x). Reiterate OUTPERFORM.
Kencana replaces Petra Perdana as top pick. Year to date, Petra Perdana’s share price has risen by a whopping 120%, outpacing the KLCI by 100% and making the stock an outstanding performer in our oil & gas portfolio. While we still like Petra Perdana, we are replacing the stock with Kencana as our top pick. We believe Kencana’s newsflow and order book replenishment for the next few months will be more exciting. Armed with a current order book of RM1.9bn, Kencana is eyeing
[ 12 ]
RM1bn worth of fabrication works in Malaysia and India and RM2bn Sabah Oil & Gas Terminal, which could raise the order book upwards of RM3bn, a potential new high.
Maintain OVERWEIGHT. We remain OVERWEIGHT on the oil & gas sector in view of the potential re-rating catalysts of 1) M&As, and 2) more active newsflow. Also unchanged are all our stock recommendations and earnings forecasts.
While the results announced by oil & gas (O&G) companies in Mar-May 09 were a mixed bag, they leaned towards the positive, unlike the previous quarter. A third of the six companies in our portfolio missed our forecasts, an improvement on 50% in 4Q08. Half of the companies broadly met our expectations (4Q08: 17%) and one (17%) surprised on the upside (4Q08: 33%). The improved statistics mirror the companies’ performance against consensus estimates. As 1Q is typically a weak quarter, we expect performance of most companies in our oil & gas portfolio to improve as the year progresses. The rising oil price provides further impetus to order book growth. As a producing country, Malaysia is poised to benefit from the upward march of the oil price. Petronas-licensed service providers offering works and facilities such as yards, tank terminals, offshore structures and maintenance jobs stand to win the most.
Valuation and recommendation
We maintain our forecasts. However, following our strategy update on 2 Jun 09, we raise our target price from RM2.41 to RM2.68 as we now attach a higher 15x forward P/E instead of 13.5x. Kencana remains an OUTPERFORM, with the potential re-rating catalysts being 1) a bigger order book, and 2) successful new ventures and markets.
1
Financial summary
Price chart
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.9
1.1
1.3
1.5
1.7
1.9
2.1
Jun-08 Nov-08 Apr-09
Volume 10m (R.H.Scale) Kencana Petroleum Bhd
FYE Jul 2007 2008 2009F 2010F 2011F
Revenue (RM m) 824.5 1,452.2 1,696.8 1,708.5 1,955.0
While the results announced by oil & gas (O&G) companies in Mar-May 09 were a mixed bag, they leaned towards the positive, unlike the previous quarter. A third of the six companies in our portfolio missed our forecasts, an improvement on 50% in 4Q08. Half of the companies broadly met our expectations (4Q08: 17%) and one (17%) surprised on the upside (4Q08: 33%). The improved statistics mirror the companies’ performance against consensus estimates. As 1Q is typically a weak quarter, we expect performance of most companies in our oil & gas portfolio to improve as the year progresses. The rising oil price provides further impetus to order book growth. As a producing country, Malaysia is poised to benefit from the upward march of the oil price. Petronas-licensed service providers offering works and facilities such as yards, tank terminals, offshore structures and maintenance jobs stand to win the most.
Valuation and recommendation
We maintain our forecasts. However, following our strategy update on 2 Jun 09, we raise our target price from RM1.87 to RM2.07 as we scale up our target P/E from 13.5x to 15x. The stock remains an OUTPERFORM on the potential re-rating catalysts of 1) active order book replenishment, and 2) successful new markets, i.e. Japan.
Financial summary
Price chart
0.00
0.50
1.00
1.50
2.00
2.50
0.5
0.7
0.9
1.1
1.3
1.5
Jun-08 Nov-08 Apr-09
Volume 10m (R.H.Scale) SapuraCrest Petroleum
FYE Jan 2008 2009 2010F 2011F 2012F
Revenue (RM m) 2,261.9 3,483.8 3,832.2 4,215.4 4,637.0
EBITDA (RM m) 342.0 463.4 498.7 546.7 599.7
EBITDA margins (%) 15.1% 13.3% 13.0% 13.0% 12.9%
Pretax profit (RM m) 171.4 280.0 353.5 412.5 481.6
While the results announced by oil & gas (O&G) companies in Mar-May 09 were a mixed bag, they leaned towards the positive, unlike the previous quarter. A third of the six companies in our portfolio missed our forecasts, an improvement on 50% in 4Q08. Half of the companies broadly met our expectations (4Q08: 17%) and one (17%) surprised on the upside (4Q08: 33%). The improved statistics mirror the companies’ performance against consensus estimates. As 1Q is typically a weak quarter, we expect performance of most companies in our oil & gas portfolio to improve as the year progresses. The rising oil price provides further impetus to order book growth. As a producing country, Malaysia is poised to benefit from the upward march of the oil price. Petronas-licensed service providers offering works and facilities such as yards, tank terminals, offshore structures and maintenance jobs stand to win the most.
Valuation and recommendation
We maintain our forecasts. However, following our strategy update on 2 Jun 09, we raise our target price from RM2.42 to RM2.69 as we tag a higher 15x forward P/E to the stock, up from 13.5x previously. We retain our OUTPERFORM call with the potential re-rating catalysts being 1) active order book replenishment, and 2) successful new markets and ventures.
Financial summary
Price chart
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
Jun-08 Nov-08 Apr-09
Volume 1m (R.H.Scale) Wah Seong Corp Bhd
FYE Dec 2007 2008 2009F 2010F 2011F
Revenue (RM m) 1,955.3 2,343.2 1,838.6 1,872.6 2,139.3
EBITDA (RM m) 162.9 247.2 277.0 304.5 321.3
EBITDA margins (%) 8.3% 10.5% 15.1% 16.3% 15.0%
Pretax profit (RM m) 116.1 152.9 217.3 242.3 256.3
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
By accepting this report, the recipient hereof represents and warrants that he is entitled to receive such report in accordance with the restrictions set forth below and agrees to be bound by the limitations contained herein (including the “Restrictions on Distributions” set out below). Any failure to comply with these limitations may constitute a violation of law. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this report may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB.
CIMB, its affiliates and related companies, their directors, associates, connected parties and/or employees may own or have positions in securities of the company(ies) covered in this research report or any securities related thereto and may from time to time add to or dispose of, or may be materially interested in, any such securities. Further, CIMB, its affiliates and its related companies do and seek to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment, advisory or other services from any entity mentioned in this report. The views expressed in this report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations(s) or view(s) in this report. CIMB prohibits the analyst(s) who prepared this research report from receiving any compensation, incentive or bonus based on specific investment banking transactions or for providing a specific recommendation for, or view of, a particular company. However, the analyst(s) may receive compensation that is based on his/their coverage of company(ies) in the performance of his/their duties or the performance of his/their recommendations and the research personnel involved in the preparation of this report may also participate in the solicitation of the businesses as described above. In reviewing this research report, an investor should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request.
The term “CIMB” shall denote where applicable the relevant entity distributing the report in that particular jurisdiction where mentioned specifically below shall be a CIMB Group Sdn Bhd’s affiliates, subsidiaries and related companies.
(i) As of 9 June 2009, CIMB has a proprietary position in the following securities in this report:
(ii) As of 9 June 2009, the analyst, Norziana Mohd Inon who prepared this report, has / have an interest in the securities in the following company or companies covered or recommended in this report:
(a) -.
The information contained in this research report is prepared from data believed to be correct and reliable at the time of issue of this report. This report does not purport to contain all the information that a prospective investor may require. CIMB or any of its affiliates does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information and opinion contained in this report and accordingly, neither CIMB nor any of its affiliates nor its related persons shall be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.
This report is general in nature and has been prepared for information purposes only. It is intended for circulation amongst CIMB and its affiliates’ clients generally and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. The information and opinions in this report are not and should not be construed or considered as an offer, recommendation or solicitation to buy or sell the subject securities, related investments or other financial instruments thereof.
Investors are advised to make their own independent evaluation of the information contained in this research report, consider their own individual investment objectives, financial situation and particular needs and consult their own professional and financial advisers as to the legal, business, financial, tax and other aspects before participating in any transaction in respect of the securities of company(ies) covered in this research report. The securities of such company(ies) may not be eligible for sale in all jurisdictions or to all categories of investors.
Australia: Despite anything in this report to the contrary, this research is provided in Australia by CIMB-GK Research Pte. Ltd. (“CIMB-GK”) and CIMB-GK notifies each recipient and each recipient acknowledges that CIMB-GK is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cwlth) in respect of financial services provided to the recipient. CIMB-GK is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. This research is only available in Australia to persons who are “wholesale clients” (within the meaning of the Corporations Act 2001 (Cwlth)) and is supplied solely for the use of such wholesale clients and shall not be distributed or passed on to any other person. This research has been prepared without taking into account the objectives, financial situation or needs of the individual recipient.
France: Only qualified investors within the meaning of French law shall have access to this report. This report shall not be considered as an offer to subscribe to, or used in connection with, any offer for subscription or sale or marketing or direct or indirect distribution of financial instruments and it is not intended as a solicitation for the purchase of any financial instrument.
Hong Kong: This report is issued and distributed in Hong Kong by CIMB-GK Securities (HK) Limited (“CGHK”) which is licensed in Hong Kong by the Securities and Futures Commission for Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) activities. Any investors wishing to purchase or otherwise deal in the securities covered in this report should contact the Head of Sales at CIMB-GK Securities (HK) Limited. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CGHK has no obligation to update its opinion or the information in this research report.
This publication is strictly confidential and is for private circulation only to clients of CGHK. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CGHK. Unless permitted to do so by the securities laws of Hong Kong, no person may issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the securities covered in this report, which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong).
Indonesia: This report is issued and distributed by PT CIMB-GK Securities Indonesia (“CIMB-GKI”). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB-GKI has no obligation to update its opinion or the information in this research report.
This publication is strictly confidential and is for private circulation only to clients of CIMB-GKI. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB-GKI. Neither this report nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesia residents except in compliance with applicable Indonesian capital market laws and regulations.
Malaysia: This report is issued and distributed by CIMB Investment Bank Berhad (“CIMB”). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB has no obligation to update its opinion or the information in this research report.
This publication is strictly confidential and is for private circulation only to clients of CIMB. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB.
[ 18 ]
New Zealand: In New Zealand, this report is for distribution only to persons whose principal business is the investment of money or who, in the course of, and for the purposes of their business, habitually invest money pursuant to Section 3(2)(a)(ii) of the Securities Act 1978.
Singapore: This report is issued and distributed by CIMB-GK Research Pte Ltd (“CIMB-GKR”). Recipients of this report are to contact CIMB-GKR in Singapore in respect of any matters arising from, or in connection with, this report. The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB-GKR has no obligation to update its opinion or the information in this research report.
This publication is strictly confidential and is for private circulation only. If the recipient of this research report is not an accredited investor, expert investor or institutional investor, CIMB-GKR accepts legal responsibility for the contents of the report without any disclaimer limiting or otherwise curtailing such legal responsibility. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB-GKR.
As of 9 June 2009 CIMB-GK Research Pte Ltd does not have a proprietary position in the recommended securities in this report.
Sweden: This report contains only marketing information and has not been approved by the Swedish Financial Supervisory Authority. The distribution of this report is not an offer to sell to any person in Sweden or a solicitation to any person in Sweden to buy any instruments described herein and may not be forwarded to the public in Sweden.
Taiwan: This research report is not an offer or marketing of foreign securities in Taiwan. The securities as referred to in this research report have not been and will not be registered with the Financial Supervisory Commission of the Republic of China pursuant to relevant securities laws and regulations and may not be offered or sold within the Republic of China through a public offering or in circumstances which constitutes an offer within the meaning of the Securities and Exchange Law of the Republic of China that requires a registration or approval of the Financial Supervisory Commission of the Republic of China.
Thailand: This report is issued and distributed by CIMB-GK Securities (Thailand) Ltd (“CIMB-GKT”). The views and opinions in this research report are our own as of the date hereof and are subject to change. If the Financial Services and Markets Act of the United Kingdom or the rules of the Financial Services Authority apply to a recipient, our obligations owed to such recipient therein are unaffected. CIMB-GKT has no obligation to update its opinion or the information in this research report.
This publication is strictly confidential and is for private circulation only to clients of CIMB-GKT. This publication is being supplied to you strictly on the basis that it will remain confidential. No part of this material may be (i) copied, photocopied, duplicated, stored or reproduced in any form by any means or (ii) redistributed or passed on, directly or indirectly, to any other person in whole or in part, for any purpose without the prior written consent of CIMB-GKT.
United Arab Emirates: The distributor of this report has not been approved or licensed by the UAE Central Bank or any other relevant licensing authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by, deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to lead to the sale of investments under any subscription agreement or the conclusion of any
other contract of whatsoever nature within the territory of the United Arab Emirates.
United Kingdom: This report is being distributed by CIMB-GK Securities (UK) Limited only to, and is directed at selected persons on the basis that those persons are (a) persons falling within Article 19 of the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005 (the “Order”) who have professional experience in investments of this type or (b) high net worth entities, and other persons to whom it may otherwise lawfully be communicated, falling within Article 49(1) of the Order, (all such persons together being referred to as “relevant persons”). A high net worth entity includes a body corporate which has (or is a member of a group which has) a called-up share capital or net assets of not less than (a) if it has (or is a subsidiary of an undertaking which has) more than 20 members, £500,000, (b) otherwise, £5 million, the trustee of a high value trust or an unincorporated association or partnership with assets of no less than £5 million. Directors, officers and employees of such entities are also included provided their responsibilities regarding those entities involve engaging in investment activity. Persons who do not have professional experience relating to investments should not rely on this document.
United States: This research report is distributed in the United States of America by CIMB-GK Securities (USA) Inc, a U.S.-registered broker-dealer and a related company of CIMB-GK Research Pte Ltd solely to persons who qualify as "Major U.S. Institutional Investors" as defined in Rule 15a-6 under the Securities and Exchange Act of 1934. This communication is only for Institutional Investors and investment professionals whose ordinary business activities involve investing in shares, bonds and associated securities and/or derivative securities and who have professional experience in such investments. Any person who is not an Institutional Investor must not rely on this communication. However, the delivery of this research report to any person in the United States of America shall not be deemed a recommendation to effect any transactions in the securities discussed herein or an endorsement of any opinion expressed herein. For further information or to place an order in any of the above-mentioned securities please contact a registered representative of CIMB-GK Securities (USA) Inc.
Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
RECOMMENDATION FRAMEWORK #1*
STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS
OUTPERFORM: The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 12 months.
OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 12 months.
NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant benchmark's total return.
NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months.
UNDERPERFORM: The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 12 months.
UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 12 months.
TRADING BUY: The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 3 months.
TRADING BUY: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 3 months.
TRADING SELL: The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 3 months.
TRADING SELL: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 3 months.
* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
CIMB-GK Research Pte Ltd (Co. Reg. No. 198701620M)
[ 19 ]
RECOMMENDATION FRAMEWORK #2 **
STOCK RECOMMENDATIONS SECTOR RECOMMENDATIONS
OUTPERFORM: Expected positive total returns of 15% or more over the next 12 months.
OVERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next 12 months.
NEUTRAL: Expected total returns of between -15% and +15% over the next 12 months.
NEUTRAL: The industry, as defined by the analyst's coverage universe, has either (i) an equal number of stocks that are expected to have total returns of +15% (or better) or -15% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +15% to -15%; both over the next 12 months.
UNDERPERFORM: Expected negative total returns of 15% or more over the next 12 months.
UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -15% or worse over the next 12 months.
TRADING BUY: Expected positive total returns of 15% or more over the next 3 months.
TRADING BUY: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next 3 months.
TRADING SELL: Expected negative total returns of 15% or more over the next 3 months.
TRADING SELL: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -15% or worse over the next 3 months.
** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.
![1Q09 Financial Advisory[1]](https://static.documents.pub/doc/80x56/577d2fa81a28ab4e1eb244fa/1q09-financial-advisory1.jpg)
