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PP 7767/09/2010(025354)

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

New s Upda te
4 May 2010
MARKET DATELINE

Kencana Petroleum Share Price


Fair Value
:
:
RM1.58
RM1.88
Gorgon LNG Fabrication Contract Recom : Outperform
(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) (%)
2008 1,140.8 118.2 7.1 (24.3) 22.1 - 5.1 15.0 21.4 Net cash 0.3
2009f 1,458.8 169.0 10.2 42.9 15.5 9.0 3.1 11.5 19.1 Net cash 0.5
2010f 1,632.6 194.4 11.7 15.0 13.5 12.0 2.4 10.3 17.4 Net cash 0.5
2011f 1,750.0 214.3 12.9 10.2 12.2 13.0 1.9 9.2 15.5 Net cash 0.6
Main Market Listing / Non-Trustee Stock * Consensus Based On IBES Estimates

Issued Capital (m shares)


♦ Bags RM166m contract. Kencana Petroleum (Kencana) announced
Market Cap(RMm)
1,657.5
2,618.8
yesterday that it had received a letter of award from Saipem S.A. (an oil Daily Trading Vol (m shs) 3.8
and gas service provider) for the fabrication of LNG jetty and marine 52wk Price Range (RM) 0.97-1.81
structures for the Gorgon LNG project. The contract is worth RM166m and Major Shareholders: (%)
is expected to be delivered in stages between 2Q11 to 3Q12. Khasera Baru 41.0
♦ Orderbooks. Recall in our note dated 15 Apr 10, we highlighted that the EPF 7.1
KWAP 5.6
company is in the final stage of negotiations for three sizeable contracts
(i.e. two from Malaysia and one from overseas), which are collectively FYE Jul FY09 FY10 FY11
worth RM400m. Hence, we expect Kencana to announce two more EPS chg (%) - - -
sizeable contracts worth around RM240m in the near term. In addition, Var to Cons (%) 13.3 (2.3) (0.6)
Kencana expects to secure around RM600-800m contracts under the
PE Band Chart
PSCs’ direct assignment by 4Q 2010.
♦ Tendering for higher-margin jobs ahead. Kencana is currently
tendering another RM4bn worth of orders, which include fabrication PER = 20x
PER = 15x
contracts in Malaysia, Myanmar, Vietnam and India as well as for the PER = 10x

long-awaited Sabah Oil & Gas Terminal. With the upgrade in the Lumut
yard (i.e. tonnage handling capability increased to 30,000 tonnes from
20,000 tonnes previously) nearing completion, we believe Kencana stands
a good chance of securing higher-margin deepwater jobs. In tandem with
the growing orderbook, we highlight that FY11-12 utilisation rate is
Relative Performance To FBM KLCI
expected increase to 85% and 92% respectively from the estimated 45-
55% in FY10.
♦ Risks. 1) Contracts in overseas markets that may have higher execution
Kencana Petroleum
risk; 2) Rising steel cost and other cost overruns; 3) Strengthening of RM
against US$; and 4) Contracts cancellation/deferment if crude oil price
FBM KLCI
pulls back.
♦ Forecasts. No change to our forecasts as we have already assumed
RM1.0-1.3bn new orders per annum flowing in over the next 24 months
to replenish existing ones.

♦ Valuations. We continue to like Kencana given its: 1) proven earnings


track record; 2) strong management; and 3) plans to diversify into more Wong Chin Wai
recurrent earnings. We believe the company’s earnings visibility will (603) 92802158
continue to improve on the back of a revival in E&P spending after recent wong.chin.wai@rhb.com.my
delays, and driven by the continued long-term shortage of E&P assets.
Yap Huey Chiang
We therefore reiterate our Outperform recommendation on Kencana
(603) 92802171
with an unchanged fair value of RM1.88/share (based on 16x FY11 PER). yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

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4 May 2010

Table 2. Earnings Forecasts Table 3. Forecast Assumptions


FYE July (RMm) FY09 FY10F FY11F FY12F FYE July FY10F FY11F FY12F
Fabrication 962.8 1,311.4 1,482.6 1,600.0 Key Drivers
EPCC 178.0 147.4 150.0 150.0 New orderbook (RMm) 900.0 1,224.0 1,600.0
Others - - - - Yard utilisation rate (%) 50.0 85.9 92.0
Revenue 1,140.8 1,458.8 1,632.6 1,750.0
Source: Company data, RHBRI estimates
EBIT 159.0 209.3 235.5 257.9
EBIT margin (%) 13.9 14.3 14.4 14.7
Interest expense (10.4) (10.1) (9.5) (9.8)
Associates 0.1 8.3 10.3 10.8
Pre-tax profit 152.8 219.5 252.4 278.3
Tax (34.5) (50.5) (58.1) (64.0)
Eff. tax rate (%) 22.6 23.0 23.0 23.0
Minorities - - - -
Net profit 118.2 169.0 194.4 214.3
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

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.

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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