PP 7767/09/2010(025354)

26 March 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e
26 March 2010
MARKET DATELINE

Kencana Petroleum Share Price

Fair Value
:
:
RM1.59
RM1.88
Stronger 2HFY10 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) (%)
2009 1,140.8 118.2 7.1 (24.3) 22.3 5.1 15.1 21.4 Net cash 0.3
2010f 1,458.8 169.0 10.2 42.9 15.6 10.0 3.1 11.6 19.1 Net cash 0.5
2011f 1,632.6 194.4 11.7 15.0 13.6 12.0 2.4 10.3 17.4 Net cash 0.5
2012f 1,750.0 214.3 12.9 10.2 12.3 13.0 2.0 9.3 15.5 Net cash 0.6
Mesdaq Board Listing / Non-Trustee Stock * Consensus Based On IBES

RHBRI Vs. Consensus

♦ 2QFY10 results largely in line. 1HFY10 core net profit of RM63.1m Above
In Line
(+4.7% yoy) accounted for 37.3% and 38.0% of our full-year forecast
Below
and market consensus. However, we consider the results to be largely in
line as we expect a stronger 2HFY10 with higher contribution from PCSB
Issued Capital (m shares) 1,656.6
and Sarawak Shell contracts as well as margin expansion arising from
Market Cap(RMm) 2,634.0
higher-margin onshore construction services (from ExxonMobil).
Daily Trading Vol (m shs) 14.2
Nevertheless, 2QFY10 EBITDA margin increased 2.1%-pts to 19.1% due 52wk Price Range (RM) 0.97-2.25
to stronger contribution from higher-margin services as well as tight cost- Major Shareholders: (%)
control. Khasera Baru 41.0
♦ Orderbooks. Kencana’s current orderbook now stands at RM1.6bn (vs. Chong Hin Loon 11.2
RM1.8bn previously). Of the current orders, we estimate that around EPF 7.1

RM1bn will be executed in FY10 and the remainder will be carried out in FYE Dec FY09 FY10 FY11
FY11. Major projects that will continue into FY10 are: EPS chg (%) - - -
1) RM403m PCSB offshore platform component and gas compression Var to Cons (%) (1.8) 4.9 0.6
module;
PE Band Chart
2) RM269.1m Sarawak Shell fabrication contract of offshore drilling
platform topside; and
PER = 20x
3) RM135m steel structural works. PER = 15x
Kencana is currently tendering another RM4bn worth of orders, which PER = 10x

include fabrication contracts in Malaysia, Myanmar and India as well as

for the long-awaited Sabah Oil & Gas Terminal. Furthermore, with
Kencana likely to buy 45% of Global Offshore and its vessel (a derrick lay
barge) we believe this would help diversify its earnings going forward.
♦ Risks. 1) Contracts in overseas markets that have higher execution risk;
Relative Performance To
2) Rising steel cost and other cost overruns; 3) Strengthening of RM KLCI
against US$; and 4) Contracts cancellation/deferment if crude oil price
pull back.
Kencana Petroleum
♦ Forecasts. No change to our forecasts for now. We believe there would
be upside to our assumption of RM1-1.3bn new orders p.a. flowing in over
the next 24 months given current orderbook replenishment rate of
RM126m/month since Jun 09.
FBM KLCI
♦ Valuations. We continue to like Kencana given its: 1) proven earnings
track record; 2) strong management; and 3) plans to diversify into more
recurrent earnings. We therefore reiterate our Outperform
recommendation on Kencana with an unchanged fair value of
RM1.88/share (based on 16x FY11 EPS). Wong Chin Wai
Please read important disclosures at the end of this report. (603) 92802158
wong.chin.wai@rhb.com.my

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Table 2. Kencana Quarterly Results

QoQ YoY YoY
FYE July (RMm) 2Q09 1Q10 2Q10 6M09 6M10 Comments
(%) (%) (%)
Revenue 274.1 281.0 250.1 (11.0) (8.7) 592.6 531.1 (10.4) Lower qoq and yoy due mainly to
lower contributions from PCSB
and MKR-1

Contract costs (222.7) (223.8) (194.9) (12.9) (12.5) (486.4) (418.6) (13.9) Commendable cost-control
measures

Gross profit 51.4 57.2 55.3 (3.4) 7.6 106.2 112.5 5.9
Gross margin (%) 18.7 20.4 22.1 17.9 21.2 Higher yoy on account of good
cost-control. Higher qoq due to
contribution from value-added
services, i.e. extending the life of
brownfield platforms.
Op expenses (12.3) (11.6) (11.9) 2.1 (3.6) (19.5) (23.5) 20.3
Other op income 1.0 2.2 4.3 99.2 326.8 1.7 6.5 275.4

EBITDA 40.1 47.8 47.7 (0.1) 19.0 88.4 95.5 8.0

EBITDA mrgn (%) 14.6 17.0 19.1 14.9 18.0 Higher YTD due to tight cost
control as well as stronger
contribution from higher-margin
services
Depn and amort (4.1) (4.3) (4.4) 3.1 8.4 (7.5) (8.7) 16.1
EBIT 36.0 43.5 43.3 (0.4) 20.2 80.9 86.8 7.2
Margin (%) 13.1 15.5 17.3 13.7 16.3

Int expense (2.3) (2.6) (3.2) 22.0 38.3 (4.4) (5.8) 30.4
Int inc 1.1 1.0 1.3 31.5 19.4 2.1 2.4 10.3
Associates 0.1 (0.1) 0.2 (510.0) 173.3 0.2 0.2 7.5
Pretax 34.9 41.8 41.7 (0.3) 19.4 78.8 83.6 6.0
Tax (7.7) (11.1) (9.4) (15.1) 22.5 (18.5) (20.5) 10.9
Tax rate (%) 22.0 26.6 22.6 (14.9) 2.6 23.5 24.6
MI - 0.1 - (100.0) n.m. - 0.1 n.m.
Net profit 27.3 30.8 32.3 4.8 18.5 60.3 63.1 4.7 6MFY09 net profit was in line
with our forecast (accounting for
49% of our full-year estimate)
Core net profit 27.3 30.8 32.3 4.8 18.5 60.3 63.1 4.7
Core EPS (sen) 1.6 1.9 1.9 4.8 18.5 3.6 3.8 4.7
Source: RHBRI

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Table 3. Earnings Forecasts Table 4. 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 (%) 76.7 85.9 92.0
Revenue 1,140.8 1,458.8 1,632.6 1,750.0

EBIT 159.0 209.3 235.5 257.9

EBIT margin (%) 13.9 14.3 14.4 14.7 Source: Company data, RHBRI estimates
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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