Petra Energy (Petra) announced that it has secured the long awaited MCM contract from Petronas Carigali. This has been widely expected by the market as Petra was one of the incumbents for the previous Pan Malaysia package. While we are positive with Petra bagging the MCM contract, the looming worry for us is on the prevailing margin compressions. As such, we assumed a wider loss on our earlier FY17E earnings and slash our FY18-19E earnings by 38-61%. We downgrade the stock to a SELL and lower our 12-month SOP based target price to RM0.90 (from RM1.03).

Secures 5+1 Year MCM Contract

Petra announced that it has been awarded the long awaited contract by Petronas Carigali Sdn Bhd for the provision of maintenance, construction and modification (MCM) services under Package B (Offshore) Sabah. This contract will be for a 5-year period (from 20 Sept 2017 and expiring on 19 Sept 2022) with a 1-year extension option. While no contract value has been announced, like the rest of the other packages, based on a conservative estimate, the value for the Sabah portion would be in the range of RM700-800m, on a call out basis.

Renewed Longer Term Earnings Visibility…

Recall that Petra won the 5-year Pan Malaysia topside major maintenance (TMM) and hook up commissioning (HUCC) contract valued at RM2.5bn back in May 2013 (HUCC and TMM portion at RM1.5bn and RM1bn). Fast forward 4 years later, Petra successfully bagged this MCM contract which will supercede the current outstanding TMM portion while the HUCC portion remains. Inclusive of this newly awarded contract, Petra’s outstanding order book will stand at RM1.5bn, which will keep them occupied until 2022.

…but Concern Over Margins; TP Lowered

We are positive on this contract win as this will support Petra’s long term earnings visibility. However, we remain wary of the possible margin deterioration moving forward. We believe that this replacement contract would likely garner a lower gross profit margin than the previous Pan Malaysia contract, which we estimate at 5-7%. We cut our margin assumption and model in a wider FY17E loss as we expect 2H17E earnings to be weak on higher operating costs. We also slash our FY18- 19E earnings by 61% and 38% respectively. Key upside risks include higher flow of work orders and margins improvement.

Source: Affin Hwang Research - 15 Nov 2017