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Kencana Petroleum Bhd
(May 18, RM1.57)
Maintain outperform at RM1.57 with target price of RM2:
Kencana is on a winning streak, having secured four contracts in five weeks, the latest being a RM45 million contract from India’s Larsen & Toubro announced on Tuesday. This takes its order book to just a shade below RM2 billion. We expect more contracts to be announced in the coming months. Kencana is aiming for RM1 billion worth of new fabrication contracts this year, of which 70% is expected to be domestic jobs.

We maintain our forecasts and target price of RM2 as we continue to apply our target market P/E (price-to-earnings) of 15 times to the stock. Kencana remains an outperform, premised on the potential re-rating catalysts of 1) active order book replenishment, and 2) M&As.

Kencana announced that its wholly owned unit and main fabrication arm Kencana HL has been awarded a US$14 million (RM45 million) contract to construct jackets for offshore platforms to be located in India. The client is India’s Larsen & Toubro. This one-off contract is expected to run from 1Q to 3QFY7/11.

The management continues to deliver its promise of growing the order book. The recent contract is Kencana’s fourth since April 15. The new contracts, worth a collective RM336 million, take Kencana’s outstanding order book to slightly below RM2 billion. The announcement was not unexpected. As we highlighted in our visit note on Tuesday, we expect active news flow from the company as it vies for RM1 billion worth of fabrication contracts this year, of which 70% is expected to be domestic jobs. Capacity is not an issue as Kencana’s 169-acre yard in Lumut is running at 50% utilisation with extra space earmarked for new contracts.

New contracts (Malaysia, India and Australia) and new ventures (offshore support, drilling and pipeline installation) fuel our optimism on Kencana. We continue to like the company for its favourable earnings prospects and its strategy of moving up the value chain with the new ventures.

As we have factored in RM1 billion worth of new contract wins per annum, we maintain our earnings forecasts and target price of RM2, pegged to an unchanged target market P/E of 15 times. — CIMB Research, May 18

This article appeared in The Edge Financial Daily, May 19, 2010.

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