Results Highlights

Barakah Offshore’s 2Q2016 net profit rose 56.5% Y.o.Y to RM7.2 mln, lifted by higher contribution from the Pan Malaysia T&I project, Pengerang Pipeline project, Pan Malaysia Hook Up Commissioning and pipeline services –Petronas Carigali’s PIG Trap System. Revenue for the quarter rose 10.5% Y.o.Y to RM136.8 mln.

For 1H2016, however, cumulative net profit halved to RM8.5 mln from RM19.8 mln in 1H2015. This only accounts for 32.1% of our full year forecast. Revenue for the period, meanwhile, fell 23.7% Y.o.Y to RM240.2 mln (1H2015: RM314.8 mln).

Concurrently, the company managed to improve its cash position to RM153.8 mln, from RM144.0 mln in 1Q2016 due to the lower capex in 2Q2016. Also, its net gearing was reduced to 28.6% in 2Q2016 vs. 37.1% in 1Q2016 as Barakah managed to steer the company’s cash flow management to a better direction with lesser working capital requirements.

Prospects

Despite the downward revision in the Pan Malaysia T&I and HUC unbilled sales quantum, the company believes that the move was not all lost to the company as the cost structure for operations have moved in tandem with the rates revision. The management also believes that the momentum in 2Q2016 has gathered pace and will continue to do so in 2H2016, based on the activities that are undertaken at this current juncture.

Meanwhile, we have also revised the orderbook replenishment rate from RM200.0 mln – RM300.0 mln to RM400.0 mln – RM500.0 mln for 2016 and 2017 respectively, given the improvement in work flows secured in 1H2016 and the progressive improvement in work flows after 1H2016, which is similar to the management’s guidance. Going forward, we expect Barakah to maintain its current balance sheet position without undertaking much debt (asset light), while the company will continue to focus on expanding its value chain whenever opportunities permit. However, the lower profitability margin conditions for new work orders would remain as Petronas and other oil majors continue to grapple with the tough crude oil environment.

Valuation And Recommendation

We maintain our HOLD recommendation with an unchanged target price (TP) of RM0.68 as the company is well supported by its unbilled orderbook of RM1.30 bln (with earnings visibility up until 2017-2018), while the management remains active in its project pre-qualification and bidding participation with a bidbook size of around RM1.90 bln for both local (70.0%) and overseas (30.0%) projects.

Our TP is arrived by ascribing an unchanged PER of 15.5x to our unchanged fully diluted 2017 EPS estimate of 4.4 sen. We make no changes to our 2016 estimates (despite the below-expectation 2Q2016 earnings) as the balance of the T&I Package A project and the major works of a slew of recently secured contracts (1H2016) will be recognised in the 2H2016.

Potential risks to our recommendation include cost overruns resulting from accidents, errors and unpredictable external condition, such as prolonged unseasonal weather. Meanwhile, a series of erratic price movement in crude oil may result in possible delays in certain project awards that could hamper Barakah’s orderbook replenishment prospects.

Source: M+ Online Research - 29 Aug 2016