Results Highlights

• Barakah Offshore’s 4Q2016 net profit sank 71.9% Y.o.Y to RM4.1 mln, dragged down by the lower margins from projects executions, coupled with higher depreciation charges amid the adjustment of its fixed assets for overseas projects. Revenue for the quarter, however, added 28.9% Y.o.Y to RM215.1 mln.

• For 2016, cumulative net profit slipped 22.9% Y.o.Y to RM14.5 mln. Revenue for the year, however, added 5.1% Y.o.Y to RM622.6 mln. The reported earnings came below our estimates, accounting to only 57.8% of our full year net profit forecast of RM25.0 mln, while the reported revenue came in within our expectations, accounting to 101.2% of our full year estimated revenue of RM615.4 mln.

• The variance in earnings is mainly due to RM8.3 mln foreign exchange loss from its KL101 U.S. Dollar denominated loan and fair valuation of its ESOS scheme, albeit cushioned slightly by some tax credits. Excluding the abovementioned items, its core net profit at RM24.5 mln would have made up to 98.1% of our estimated full year net profit of RM25.0 mln.

• Segment wise, the pipeline and commissioning services segment amounts to RM39.1 mln or 18.2% of Barakah’s revenue, while the reminder RM176.0 mln (81.8%) was contributed by the installation and construction segment in 4Q2016. Meanwhile, Barakah’s net gearing fell to 7.7% in 4Q2016 vs. 30.4% in 3Q2016 and on adjustment to the higher foreign exchange translation reserves.

Prospects

Barakah has secured two major contracts in 4Q2016 collectively worth RM45.0 mln, lifting its outstanding orderbook to approximately RM900.0 mln which will provide earnings visibility over the next 2-3 years. Despite that, we also note that the dwindling outstanding orderbook, from RM1.23 bln recorded in 3Q2016 and RM1.30 bln in 2Q2016, could impose a hurdle for its earnings growth in the foreseeable future. Meanwhile, Barakah is tendering for approximately RM1.60 bln worth of new contracts (50% from local and 50% from overseas).

Following the surprise OPEC and non-OPEC countries’ agreement to cut their production in late-November, crude oil prices staged a sharp recovery averaging at US$49.27 in 4Q2016 (+9.5% Q.o.Q). We think that crude oil prices could see an extended recovery towards the US$55-US60 per barrel in 2017, on the back of demand-supply rebalancing in 2H2017. The recovery in oil prices could also signal oil majors (PETRONAS in Malaysia) to re-look their initial capex plans for the coming two years.

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. Barakah will also continue execute their cost rationalisation measures to improve overall operational efficiency. Its asset-light business model is aimed at enabling the group to ride out the prolonged weakness in the oil & gas industry that has engulfed the sector over the past couple of years.

Valuation And Recommendation

With the reported earnings coming below our estimates, we cut our net earnings forecast by 28.4% and 12.1% to RM25.5 mln and RM37.3 mln for 2017 and 2018 respectively to reflect the potentially lower work billings and slower work flow as the oil & gas industry mounts a slow recovery. Consequently, we expect its earnings recovery to be slower over the foreseeable future, as with potentially tighter margins on its new projects. Still, we maintain our HOLD recommendation with an unchanged target price of RM0.70 after we rolled over our valuations to 2018, which should see a stronger earnings recovery. Our target price is arrived by ascribing an unchanged target PER of 15.5x to our rolled-over 2018 fully diluted EPS estimate of 4.5 sen.

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 - 28 Feb 2017