WHAT’S NEW

Barakah Offshore Petroleum Bhd has bagged a contract from Enquest Petroleum Production Malaysia to provide Pan Malaysia maintenance, construction and modification (MCM) services from 2018 to 2023 under Package A. No work value or estimate is stated, the contract will commence from 13 Jul 18 for a period of 5+1 years.

COMMENT

Surprise win. We understand that the company is still in the midst of securing more Pan Malaysia MCM packages from more PSC operators other than Enquest. Assuming more such contracts are being secured, we estimate that the total available work value could reach the ~RM1b range. Assuming this case, this is above the target replenishment of RM0.5b in 2018 guided by management, and is above the current contract value of RM0.2b (of which 70% are in Sarawak waters). Although the contracts are on call-out, having several packages spread across a few clients (instead of just one single client) should bring some confidence that work orders will be issued

However, concerns on execution remain. Although we are positively surprised by the contract win, we are still concerned over its execution ability given the many occasions of cost overruns and earnings disappointments in its past contracts (namely the Pan Malaysia T&I, Pengerang, and the recent IRM jobs). Moreover, we are also concerned over its balance sheet ability. While there is minimal capex required, the group will require substantial working capital to execute the project as and when work orders are being issued. On top of the fact that its operating cash flow is still in the red, the group’s cash balance (excluding RM95m fixed deposits) had already declined to RM3m, while net gearing is >1x on equity of RM179m.

Retain 2018-20 loss forecasts of RM46m/RM30m/RM15m. Despite the new contract replenishments from Pan Malaysia T&I, Pan Malaysia MCM and other jobs such as the Sabah-Sarawak Gas Pipeline, the dependency on the conservative Petronas still complicates its earnings visibility. The entry of Samling Group as an influential shareholder may offer the group plenty of job opportunities, but not likely in the immediate term.

Maintain SELL and target price of RM0.06. We are still concerned over its execution ability despite the new contract wins. Given that the group will record losses going forward and the increasing risk of default/ PN17, we value the stock at P/B valuation of 0.6x. 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 turn around to profitability. 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 Jul 2018