Results Highlights

• Barakah Offshore’s 3Q2016 net profit stood at RM2.0 mln vs. a net loss RM15.4 mln in the previous corresponding period, owing to the higher contribution from the installation and construction services segment, coupled with the cost rationalisation exercise and procurement optimisation. Revenue for the quarter rose 50.8% Y.o.Y to RM167.2 mln.

• For 9M2016, cumulative net profit jumped 142.1% Y.o.Y to RM10.5 mln. Revenue for the period, however, slipped 4.3% Y.o.Y to RM407.5 mln. Both the reported earnings and reported revenue came below our expectations, accounting to 39.6% and 65.0% of our previous full year estimated net profit and revenue of RM26.5 mln and RM626.9 mln respectively. However, we think that both the top and bottom lines could see further recovery given that the delay in the recognition of several key projects would materialise in the coming quarter.

• Segment wise, the pipeline and commissioning services segment amounts to RM18.9 mln or 11.3% of Barakah’s revenue, while the reminder RM148.3 mln (88.7%) was contributed by the installation and construction segment in 3Q2016. Meanwhile, Barakah’s net gearing increased to 30.4% in 3Q2016 vs. 28.6% in 2Q2016 as it required higher working capital during the quarter for increased work on the installation and construction segment, coupled with slower cash conversion cycle due to the sluggish general oil & gas industry.

Prospects

We note that Barakah has secured four major contracts in 3Q2016, lifting its outstanding orderbook to RM1.23 bln which will provide earnings visibility over the next 2-3 years. Nevertheless, we also note that the thinning outstanding orderbook, from RM1.30 bln recorded in 2Q2016, will impose a hurdle for stronger earnings growth in the foreseeable future.

With the recent recovery in crude oil prices, coupled with the cost rationalisation measures imposed, we think that Barakah will be able to ride out the prolonged weakness in the oil & gas industry, well supported by its unbilled orderbook of RM1.23 bln. Meanwhile, Barakah is tendering for approximately RM3.30 bln worth of new contracts (65% from local and 35% from overseas). We have imputed an orderbook replenishment rate for Barakah between RM400.0 mln – RM500.0 mln per annum for 2017 and 2018 respectively.

Going forward, we expect Barakah to maintain its lean balance sheet position without undertaking too much debt (asset light), while the company will continue to focus on expanding its value chain whenever opportunities permit. However, the profitability margin for new work orders would remain compressed as Petronas remains on track to cut both its operational and capital expenditure by RM15.0 bln-RM20.0 bln in 2016. Already in the recent Budget 2017, the government is expecting a reduction in contributions from the oil & gas sector to just 13.8% in 2017 (14.6% in 2016) – highlighting the continuing challenging environment for the oil & gas sector.

Valuation And Recommendation

With the reported earnings coming below our estimates, we trimmed our net earnings forecast by 5.6% and 10.8% to RM25.0 mln and RM35.6 mln for 2016 and 2017 respectively to reflect the delay in work billings and slower work flow. Nevertheless, we maintain our HOLD recommendation with a lower target price of RM0.65 (from RM0.68).

Our target price is arrived by ascribing an unchanged target PER of 15.5x to our revised 2017 fully diluted EPS estimate of 4.2 sen. We think that earnings should recover further over the foreseeable future, premised on a slew of recently secured contracts that will be recognised progressively over the coming months.

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 also hamper Barakah’s orderbook replenishment prospects.

Source: Mplus Research - 29 Nov 2016