• The majority of Barakah’s projects were dependent from Petronas. However, the national oil & gas company is tightening spending amid the generally insipid environment on the oil & gas sector where the combination of excess supply and capacity – both upstream and downstream, limits fresh investments into the sector. Hence, the outlook for the rest of the year remains challenging amid the still slow progress among Barakah’s ongoing projects where 76.0% of its outstanding orderbook are on a call-out basis and is highly subjected to its clients’ CAPEX and OPEX requirements.
   
• Several projects deferments, coupled with thinning unbilled orderbook at approximately RM900.0 mln, could continue to weigh on its future earnings growth. Thus far, the group only secured approximately RM100.0 mln worth of new projects year-to-date – lower than approximately RM200.0 mln worth of contracts secured during the same period in the previous year. In view of the absence of new catalysts and the difficult operating environment expected to prolong, we are ceasing our coverage on Barakah Offshore Petroleum. Our previous call was a Sell.

• We expect Barakah’s net profit to deteriorate to RM2.0 mln (-86.1% Y.o.Y) in 2017, before recovering with a net profit of RM19.9 mln in 2018 on the expectations of a rebalancing in crude oil demand and supply which may translate to higher crude oil prices. However, we still see fewer new orders due to uncertain price outlook.

• Our last assigned target price was RM0.36, derived by ascribing an unchanged target PER of 15.0x to our unchanged 2018 EPS estimate of 2.4 sen. At the current price, Barakah’s valuation is expensive vis-à-vis the industry averages.

Source: Mplus Research - 10 Jul 2017