KENCANA : Maintain outperform at RM1.66 with TP of RM2.28

Kencana’s record 4Q fuels a record FY10

Kencana Petroleum Bhd
(Sept 30, RM1.66)
Maintain outperform at RM1.66 with target price of RM2.28: As previewed, Kencana posted a record 4QFY2010 net profit of RM42 million, taking full-year bottom line to an all-time high of RM136 million. At 3% above our full-year forecast, we consider the performance to be in line with our expectations.

However, it exceeded the consensus estimate by 6%. Similar to last year, the dividend announcement will be made at a later date.
The company is reaping the benefits from moving up the value chain, evident from the double-digit bottom line growth despite a top line contraction.

We maintain our forecasts and target price of RM2.28 as we continue to apply our target market PER of 13.8 times to the stock. Kencana remains an “outperform”, premised on the potential re-rating catalysts of active order book replenishment and mergers and acquisitions.

Its 4Q net profit rose 37% year-on-year (y-o-y), helping Kencana to cap the year on a strong note. FY2010 net profit grew 15% y-o-y, despite a 5% fall in revenue, as Kencana took on more works for higher-end structures which gave better margins.

The double-digit growth in FY2010 was mostly supported by two factors: (i) Completion of the US$136 million (RM420 million) construction of KM1, work on which started in January 2008; and (ii) Commencement of marine support operations, formerly the missing link in the company’s offshore operations. During the year, Kencana launched two AHTS vessels, the 67%-owned 5,500HP KPV Kapas and wholly owned 8,080HP KPV Gemia.

Kencana will open another new chapter this year with the start of its drilling business. KM1 is on a five-year, RM827 million Petronas Carigali drilling contract. Management confirmed that the contract started on Sept 2 and the rig starts drilling this week for a daily charter rate of US$130,000 per day, higher than the average global rate of US$114,617.

Also, this year, investors can look forward to a potential third marine support asset after the two AHTS vessels. It is no secret that Kencana is keen to own a pipelay barge following the JV breakdown with Global Offshore Malaysia Sdn Bhd in June.

Among the listed oil & gas companies, Kencana’s news flow has been the most active year-to-date. Since April, it has secured nine new contracts worth a collective RM772 million. The new jobs take the company’s outstanding order book to RM2.4 billion. This compares with its all-time high of RM2.8 billion recorded in October to December 2008. — CIMB Research, Sept 30

This article appeared in The Edge Financial Daily, October 1, 2010.