PP 7767/09/2010(025354)

20 April 2010

Malaysia Corporate Highlights

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

V is it Note
20 April 2010
MARKET DATELINE

Kencana Petroleum Share Price

Fair Value
:
:
RM1.52
RM1.88
Going Into IPF 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) 21.4 4.9 14.5 21.4 Net cash 0.3
2010f 1,458.8 169.0 10.2 42.9 15.0 10.0 3.0 11.2 19.1 Net cash 0.5
2011f 1,632.6 194.4 11.7 15.0 13.0 12.0 2.4 9.9 17.4 Net cash 0.5
2012f 1,750.0 214.3 12.9 10.2 11.8 13.0 1.9 8.9 15.5 Net cash 0.6
Main Market Listing / Non-Trustee Stock * Consensus Based On IBES Estimates

♦ Improving orderbook replenishment. While contract flow has been slow Issued Capital (m shares) 1,657.3
since early 2009, the company now expects to be awarded sizeable Market Cap(RMm) 2,535.7
contracts given the pick-up in E&P activities stemming from rising demand Daily Trading Vol (m shs) 3.8
52wk Price Range (RM) 0.98-2.01
for energy. Given the orderbook replenishment of around RM1-1.2bn by 4Q
Major Shareholders: (%)
2010 and burn-rate of around RM300m/quarter, we expect Kencana’s
Khasera Baru 41.0
orderbook to remain above RM1.9bn going into 2011. Kencana is currently
EPF 7.1
tendering another RM4bn worth of orders, which include fabrication KWAP 5.6
contracts in Malaysia and overseas. With the upgrade in the Lumut yard
(i.e. tonnage handling capability increased to 30,000 tonnes from 20,000 FYE July FY10 FY11 FY12
tonnes previously) nearing completion, we believe Kencana stands a good EPS chg (%) - - -
Var to Cons (%) 2.0 (2.3) (0.5)
chance of securing higher-margin deepwater jobs.
♦ Second AHTS vessel launched. Recently, Kencana secured a 1 + 1 PE Band Chart
contract worth RM33m to provide an offshore support vessel to Petronas
Carigali Vietnam. We understand that the 8k AHTS (KPV Gemia), which PER = 20x
PER = 15x
Kencana took delivery two weeks ago, will be deployed for the contract. The PER = 10x
contract sum suggests that an average long-term charter rate of around
US$1.63/HP/day vs. spot charter rates of US$2.1/HP/day.
♦ Going into IPF. Recall in Jan 2010, a US$70m IPF contract has been
awarded to Global Offshore, in which Kencana is planning to have 45%
equity participation, higher than the 30% local content requirement. We
understand that Kencana is expected to invest around RM63m for the 45% Relative Performance To FBM KLCI
equity stake in Global Offshore which owns the DLB 264, the pipelay barge
that will be used to perform work for the above contract.
Kencana Petroleum
♦ Risks. 1) Contracts in overseas markets that have higher execution risk; 2)
Rising steel cost and other cost overruns; 3) Strengthening of RM against
US$; and 4) Contracts cancellation/deferment if crude oil price pull back.
FBM KLCI
♦ 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. Nevertheless, we highlight potential upside to FY11-
12 earnings projections arising from stronger orderbook replenishment
Wong Chin Wai
stemming from overseas contracts and demand for deepwater structures as (603) 92802158
well as stronger contribution from its marine division. wong.chin.wai@rhb.com.my
♦ Valuations. We believe the company’s earnings visibility will continue to
improve on the back of a revival in E&P spending after recent delays, and
Yap Huey Chiang
driven by the continued long-term shortage of E&P assets. We therefore
(603) 92802171
reiterate our Outperform recommendation on Kencana with an unchanged
yap.huey.chiang@rhb.com.my
fair value of RM1.88/share (based on 16x FY11 EPS).

Please read important disclosures at the end of this report. Page 1 of 5

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 20 April 2010

Key Highlights.

Fabrication

♦ Improving orderbook replenishment. While contract flow has been slow since early 2009, the company
now expects to be awarded sizeable contracts given the pick-up in E&P activities stemming from rising
demand for energy. According to management, the company is in the final stage of negotiations for three
sizeable contracts (i.e. two from Malaysia and one from overseas), which are collectively worth RM400m. In
addition, Kencana expects to secure around RM600-800m contracts under the PSCs’ direct assignment by 4Q
2010. Hence, with the orderbook replenishment of around RM1-1.2bn by 4Q 2010 and burn-rate of around
RM300m/quarter, we expect Kencana’s orderbook to remain above RM1.9bn going into 2011.

♦ Potential upside to RM1.9bn orderbook. Kencana is currently tendering another RM4bn worth of orders,
which include fabrication contracts in Malaysia, Australia (i.e. Gorgon project), Myanmar, Vietnam and India
as well as for the 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 expected increase to 85% and 92%
respectively from the estimated 45-55% in FY10.

Table 2. Kencana’s Orderbook

Contract Value Recognised
Project Balance (RMm)
(RMm) Revenue (RMm)
Kencana HL

MKR1-Tender rig 466.2 392.9 73.3

Cameron-BHP Pyrennes 29.0 27.4 1.6

FMC - Subsea Equipment 10.2 7.8 2.4

SSB - Offshore drilling platform topside 190.6 44.5 146.1

PCSB - Offshore platform component & gas compression module 361.3 170.8 190.5

Murphy – Fabrication of SEPA Topside 60.9 27.3 33.6

PCSB – HUC of offshore pipeline 5.0 0.0 5.0

PCPP – Fabrication and installation of D-30 offshore platform 94.8 23.0 71.8
Global Offshore International – Fabrication of components for pipe-lay
barge 40.6 7.6 33.0
Newfield - Offshore platform 21.6 11.1 10.5
Afcons-Gunanusa JV – Construction of jackets for offshore process
platform 50.5 2.2 48.3
FMC – Manifold support structure 12.0 2.6 9.4
Sub-total 620.5

Kencana Pinewell

PCSB – Umbrella Contract (Associates Host Tie-in for PL347 Pipeline

Replacement) 31.4 31.0 0.4
ExxonMobil– Provision of Offshore Construction Services 90.0 0.0 90.0
CPOC – JKA, MDA, MDB & LQ Carry Over Works 38.6 22.1 16.5
PCSB – 14 Additional Flow Lines 2.0 1.0 1.0
MLQD – Damage repair works 18.0 17.6 0.4
Sub-total 108.3

Kencana Best Wide

Various process skid systems 10.5 - 10.5

Sub-total 10.5

Torsco Sdn. Bhd.

Page 2 of 5

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 20 April 2010

Steel structural works 161.1 76.4 84.7

Sub-total 84.7

Kencana Petroleum Ventures

Offshore Drilling Services 827.2 0.0 827.2

Sub-total 827.2

Total 1,651.2
Total (exclude offshore drilling services) 824.0
Source: Company

Marine Services

♦ Second AHTS vessel launched. Recently, Kencana secured a 1 + 1 contract worth RM33m to provide an
offshore support vessel to Petronas Carigali Vietnam. We understand that its 8k AHTS (KPV Gemia), which
Kencana took delivery two weeks ago, will be deployed for the contract. The contract sum suggests that an
average long-term charter rate of around US$1.63/HP/day vs. spot charter rates of US$2.1/HP/day.
Separately, we note that its 5.2k AHTS (launched on 11 Jan 2010) is currently performing work for the
RM90m Exxon Mobil contract and is expected to be put on long-term charter (about a year) beginning May-
June 2010. Both of these vessels are built by Nam Cheong, with the investments of around RM79m and
RM46m for the 8k AHTS and 5.2k AHTS respectively.

♦ Adding a workbarge to its fleet. While Kencana would likely add another workbarge to its fleet, we
understand that fabrication work on this vessel has not started as the company is still waiting for the final
technical requirements from the PSCs. Management highlighted that Kencana would be able to construct its
own vessel at a competitive cost given its experience in conversion and refurbishment of marine assets
(including conversion of jack-up rig into mobile offshore production unit as well as refurbishment of plain flat-
top barge into a pipelay barge). According to management, the fabrication of the workbarge would cost
around RM120m. Hence together with the two AHTS, Kencana’s investments in these marine assets will
amount to around RM245m. A portion of the RM185m proceeds raised from the recent rights issues will be
used to finance the new marine assets.

♦ To bid for RM1.5bn contracts. We believe Kencana would be bidding for a 5-year RM1.5bn offshore
maintenance contracts, of which 60% will involve marine services and the remainder will call for maintenance
and refurbishment services for various offshore structures. We gathered that the PSCs would be calling for
the bids in 2Q 2010. Potential competitors include Petra Energy, Dayang Enterprise and Vastalux.

♦ Going into IPF. Recall in Jan 2010, a US$70m IPF contract was awarded to Global Offshore, in which
Kencana is planning to have 45% equity participation, higher than the 30% local content requirement. Note
that Global Offshore is a unit of NYSE-listed Global Industries. We understand that Kencana is expected to
invest around RM63m for the 45% equity stake in Global Offshore which owns the pipelay barge DLB 264, to
be used for the above contract. While the contract size is smaller than Sapuracrest’s RM1.5bn IPF job, we
highlight that it is significant because Global and Kencana are penetrating into a segment that has long been
dominated by Sapuracrest.

♦ MKR-1 to perform PCSB contract beginning July 10. According to management, MKR-1 would begin
operating under the 5+5 years PCSB contract worth RM827.2m beginning July 2010. While the charter rate of
US$125k/day appears lower than SapuraCrest’s T-9 rate of US$141k, we note that MKR-1 is on a longer-
term contract duration vs. SapuraCrest’s three-year contract. Management guided that projects would be
profitable as long as charter rates stay above US$100k. As for MKR-2, fabrication work for the second rig has
been temporarily suspended pending clearer visibility of the PSC’s drilling requirement.

Page 3 of 5

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 20 April 2010

Risks and mitigating factors

♦ 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) Contracts cancellation/deferment if crude oil price pull
back.

♦ Mitigating factors. 1) We believe risk of cost overruns would be partly mitigated by the company’s risk
management system and long experience in major fabrication work; and 2) We believe oil majors would
begin investing in E&P assets given that crude oil price has stabilised above US$80/barrel.

Valuation and recommendation

♦ 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. Nevertheless, we highlight potential upside to
FY11-12 earnings projections arising from stronger orderbook replenishment stemming from overseas
contracts and demand for deepwater structures as well as stronger contribution from its marine division.

♦ 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 believe the company’s earnings visibility will
continue to improve on the back of a revival in E&P spending after recent delays, and driven by the continued
long-term shortage of E&P assets. We therefore reiterate our Outperform recommendation on Kencana with
an unchanged fair value of RM1.88/share (based on 16x FY11 EPS).

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 (%) 50.0 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

Page 4 of 5

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 20 April 2010

Chart 1: Kencana Technical View Point

♦ After a nine-and-a-half-month rally since Mar 2009,
the share price of Kencana reached a high of
RM1.81 in mid-Jan 2010.

♦ However, the stock immediately recorded a

“shooting star doji” candle and reversed its position
to below the key level of RM1.72. Thus triggering a
retracement move on the chart.

♦ But, at the low of RM1.35 in early Feb 2010, the

stock started to recover. It congested at around the
RM1.50 region for a while, before heading towards
the RM1.68 level in early Apr.

♦ It then retreated mildly to close at RM1.53 on

Monday, registering its third negative candle in a
row.

♦ Technically, given the weaker momentum readings

of late, the stock is likely to revisit the RM1.50
support region soon.

♦ Nonetheless, we expect a firm support at RM1.50

to buffer selling pressure. Next support is seen at
RM1.23.

IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to
opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer,
invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no
reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an
interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of
persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular
investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend
on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or
damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group
may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of
any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services
from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

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.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities,
subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

Page 5 of 5

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com