Results Highlights

• Barakah Petroleum posted a net loss of RM4.6 mln in 1Q2017 against a net profit of RM1.3 mln in the previous corresponding period. Revenue, meanwhile, declined 25.6% Y.o.Y to RM76.8 mln as work order slowed substantially during the quarter.

• The results were significantly below expectations as the difficult operating environment in the oil & gas sector continues to bite. In particular, its installation and construction services work saw a 44.3% drop in revenue to RM45.8 mln on fewer orders, particularly from the Pan Malaysian T&I project where the new cycle has yet to commence. A respite, however, came from the pipeline and commissioning services unit that posted a 47.4% jump in revenue to RM31.1 mln.

• Apart from the lower revenue, its margins were also tighter with its gross profit margin slipping to 22.0% in 1Q2017, from 27.8% in the previous corresponding period despite its continuous cost cutting measures. Its earnings were further depressed by higher depreciation charges on its KL101 barge following a restatement of the asset value to U.S. Dollars.

• Meanwhile, the group has yet to secure any new contracts in 1Q2017 and the replenishment visibility for local jobs are also dim in view of Petronas’s capex and opex cuts. Therefore, the group is now switching its focus to regional jobs, despite the more intense competition, as it looks to reduce its reliance on domestic jobs and to replenish its current combined unbilled orderbook of RM1.8 bln.

Prospects

The outlook for the rest of the year remains challenging amid the still slow progress among its ongoing projects where 76% of its outstanding orderbook is on a call-out basis and is highly subjected to its clients’ CAPEX and OPEX requirements. With Petronas still on a tight leash on its spending, the group’s work order prospects remain clouded, albeit there should still be some regular inspection jobs later in the year. Still, we expect the slow work flow environment to persist for the next few quarters as activities in the oil & gas sector are still looking dull and will continue to affect Barakah’s job prospects.

Meanwhile, its KL 101 barge is idle with the low work orders and is continuing to strain the group’s cash flow with interest payments and the higher depreciation charges. Although the group is exploring its options to reduce the above cash flow burden, including an asset light model, the exercise could be hampered by the potentially lower realiseable value amid the oversupply environment.

Apart from potentially adopting an asset light business model, Barakah is also looking at other opportunities within and outside the oil & gas industry and will also continue to strengthen its operating capabilities and efficiency. Given the fewer available jobs, the group will continue to reduce its head count and undertake further cost cutting measures to focus on technology-driven business. However, all these initiatives will require years to implement and unlikely to have any material near term impact.

Valuation And Recommendation

We continue to revise our earnings forecast and with the reported earnings once gain coming below our estimates, we now expect the group to post a net loss of RM9.7 mln for 2017, while for 2018, we cut our net profit forecast by 65.0% to RM13.0 mln in view of the fewer available jobs and slower progress of its ongoing projects over the next two years. We have also trimmed our orderbook replenishment expectations amid Petronas’ tighter spending and the generally insipid oil & gas sector where the combination of excess supply and capacity – both upstream and downstream, will limit fresh investments into the sector.

In view of its weaker prospects for the next two years, we are also downgrading our recommendation to SELL (from Hold) and a lower target price of 25.0 sen (previously 70.0 sen). Our recommendation reflects the difficult operating environment that will permeate for longer and will continue to hurt its business prospects. Our target price is arrived by ascribing a lower target PER of 14.5x to our 2018 fully diluted EPS estimate of 1.6 sen. The lower target PER is within its industry peer average.

Potential risks to our recommendation include a stronger recovery in its margins that will shore up its earnings, an acceleration in its work orders on its current orderbook and higher orderbook replenishment amid the stronger crude oil prices

Source: Mplus Research - 1 Jun 2017