RESULTS

• 1Q18 core loss was below expectations. The core loss, which excluded RM6m of unrealised forex loss, met 65%/ 20% of our/consensus loss forecasts respectively. The disappointment was attributed to significantly low activity from the Inspection, Repair & Maintenance (IRM) contract, part of the ICS segment. The IRM contract utilises a specialised vessel which was temporarily demobilised since end-17 (after recognising about RM70m in 2H17 which was the contract start-up period), and is only expected to resume work from mid-18. T&I and other projects also remained at near standstill. We note however, that the group managed to record a gross profit unlike in the past few quarters. This is because the COGS was kept below revenue (despite the low activity). We believe this new cost base is sustainable as the group successfully prevented further cost bleeding from legacy projects, such as the Pengerang Pipeline.

• Cost control is showing, but cash flow risk remains. While management had successfully renegotiated the financing facility of KL101 (whereby the principal repayments are deferred till end-18), its cash balance continued to decline to RM3m vs RM30m in 2Q17. The group is now drawing from its fixed deposits pledged to banks (RM95m, vs RM103m in 4Q17). There is no concern of Barakah breaching debt covenants for now, despite its high gross gearing of >1x post-impairment. The outstanding loan is US$45m (main banker is EXIM) and the carrying value (ex-financing) is US$42m. However, equity continued to decline to RM179m vs RM203m in 2017.

• Risk of PN17 not immediate. As its auditors have expressed a going concern issue on the group, the risk of PN17 will be triggered if its equity falls to RM80m i.e. 50% of the share capital. Including the complexity of forex movements, we estimate that this risk will be material if the losses’ run rate persists in 3-4 quarters. Its operating cash flow is a loss of RM13m (2017: RM72m loss), while interest cover is also negative.

EARNINGS REVISION

• Widen 2018-20 loss forecasts to RM46m/RM30m/RM15m, from RM21m/RM4m/RM20m previously. The group guided that it has RM150m work orders for 2018 secured under the PCS segment, and is pursuing more work orders to replenish its revenue. However, its dependency on the conservative Petronas complicates its earnings visibility, despite higher level of oil prices. The entry of Samling Group as an influential shareholder may offer the group plenty of job opportunities, but not likely in the immediate term.

RECOMMENDATION

• Maintain SELL, cut target price to RM0.06 (from RM0.18). Given that the group will record losses going forward and the increasing risk of default/ PN17, we reduce our P/B valuation to 0.6x from 0.8x. This is at a P/B discount to other asset-light O&G services players such as Uzma and Deleum. We continue to opine that mid-18 is a crucial period for the group to secure new orderbook and earnings replenishment. In the worst-case scenario, Barakah’s valuation could shrink to RM0.03 (0.1x P/B), essentially reflecting bankruptcy risks.

Source: UOB Kay Hian Research - 31 May 2018