PP 7767/09/2010(025354)

5 October 2010
RHB Research
Corporate Highlights
Malaysia
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

N ew s Updat e
5 October 2010
MARKET DATELINE

Kencana Petroleum Share Price

Fair Value
:
:
RM1.73
RM1.80
Two More Wins Recom : Market Perform
(Maintained)

Table 1 : Investment Statistics (KENP; Code: 5122) Bloomberg: KEPB MK

Net EPS Net
FYE Revenue Profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing GDY
July (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (x) (%)
2010a 1,089.7 135.8 8.2 14.5 21.1 3.4 14.6 15.4 Net cash 0.3
2011f 1,532.6 198.4 12.0 46.0 14.5 12.1 2.6 9.5 19.7 Net cash 0.5
2012f 1,700.0 226.9 13.7 14.5 12.6 13.1 2.0 8.3 17.7 Net cash 0.6
2013f 1,850.0 253.1 15.3 11.5 11.3 14.3 1.8 8.2 15.5 Net cash 0.6
Main Market Listing / Non-Trustee Stock * Consensus Based On IBES Estimates

Issued Capital (m shares) 1,658.2

♦ Taking home two more contracts. Kencana announced two wins
Market Cap (RMm) 2,868.6
yesterday: 1) a contract from Newfield Peninsula Malaysia Inc. valued at Daily Trading Vol (m shs) 3.9
RM21.6m for procurement and construction of jackets for a wellhead 52wk Price Range (RM) 1.252-1.81
platform and a central processing platform for PM329 East Piatu Major Shareholders: (%)
Development; and 2) a contract from Lynas Malaysia S/B valued at Khasera Baru 39.2
RM9.1m for the design, fabrication, lining, supply, installation, and EPF 6.8
commissioning of carbon steel and stainless steel tanks on full turnkey KWAP 5.9
Management 5.8
basis. Both contracts are expected to be delivered within 1QFY11.

♦ Tenth win thus far. Both these contracts lifted the company’s
FYE Jul FY11 FY12 FY13
cumulative wins to around RM700m. The contracts are the traditional
EPS chg (%) - - -
fabrication ones and should thus fetch net margins of around 10% and Var to Cons (%) (1.2) 4.5 6.8
generate net profits of RM3.1m.
PE Band Chart
♦ Kencana takes over Labuan Shipyard? The company denied The
Edge’s article which mentioned it is looking to take over Labuan Shipyard
PER = 20x
and Engineering S/B. It however announced that both parties are PER = 15x
exploring the possibility of working together for mutual benefits. On PER = 10x

Kencana’s end, the tie-up would boost its chances in securing part of the
RM3.7bn worth of contracts (refer to Table 2) where around RM1.2bn are
from East Malaysia, while for Labuan Shipyard and Engineering S/B, it will
be able to increase its yard’s capacity utilisation. Given that Kencana’s
current capacity is not fully utilised, we believe it is unlikely that they will Relative Performance To FBM KLCI
look to increase their yard space; as such we are in favour of a tie-up
instead of a capacity increase.

♦ Forecasts. No change to forecasts at this juncture, as our assumptions Kencana Petroleum

already factor in new contracts for FY10-12. Moreover, contribution to net

earnings is minimal.
FBM KLCI
♦ Risks. 1) Contracts in overseas markets that have higher execution risk;
2) Rising steel cost and other cost overruns; 3) Strengthening of RM
against US$; and 4) Delay in contracts if crude oil price pulls back.

♦ Investment case. Things continue to look positive for Kencana, despite

our concerns about the near-term prospects for the oil and gas sector.
Yap Huey Chiang
We thus maintain our Market Perform call on the stock with a fair value of
(603) 92802239
RM1.80/share based on target PER of 15x. yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

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Table 2: Order Book and Tender Book

Description Estimated Contract Value (RM’m) Duration (years)

Petronas Carigali Topside Structural
Maintenance Contract SKO (Sarawak 800 5
Operations)
Petronas Carigali Topside Structural
Maintenance Contract SBO (Sabah 400 5
Operations)
Petronas Carigali Topside Structural
Maintenance Contract PMO (Peninsular 500 5
Operations)
Hook-up & Commissioning Umbrella Contract 2,000 2

Total 3,700

Source: Various

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE July (RMm) FY10 FY11F FY12F FY13F FYE July FY11F FY12F FY13F
Fabrication 1,041.4 1,232.6 1,400.0 1,550.0 Key Drivers
EPCC 147.4 150.0 150.0 150.0 New orderbook (RMm) 974.0 1,400.0 1,550.0
Drilling - 150.0 150.0 150.0 Yard utilisation rate (%) 80.6 89.4 97.3
Revenue 1,089.7 1,532.6 1,700.0 1,850.0

EBIT 178.5 256.5 292.8 318.0

EBIT margin (%) 16.4 16.7 17.2 17.2 Source: Company data, RHBRI estimates
Interest expense (11.5) (13.5) (13.8) (14.1)
Associates (0.8) 0.4 0.5 0.5
Pre-tax profit 171.3 243.7 278.3 311.8
Tax (35.6) (45.4) (51.3) (58.7)
Eff. tax rate (%) 20.8 22.0 22.0 22.0
Minorities - - - -
Net profit 135.8 198.4 226.9 253.1
Source: Company data, RHBRI estimates

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Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

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Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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