It’s More Than Just Earnings Concerns Now

Although Petra Energy’s (PENB) 1Q18 earnings were within expectations, we however believe this is not the only worries as the concerns at shareholder level have led to a significant de-rating of the shares post GE14. As these concerns are unlikely to be resolved in the near future, we are downgrading the stock to HOLD from BUY and lowering our target price to RM0.40 from RM0.83.

Results Within Expectations

PENB’s 1Q18 net profit stood at RM1m. After excluding RM12.4m in disposal gains, PENB reported a core net loss of RM13.5m. This is worse than the core profit of RM4.7m recorded in 1Q17. The main culprit for this huge decline was the lower associate profit, which fell by 73% yoy to RM4.1m as KBM RSC underwent some production enhancement exercises; hence remuneration fees had to first cover the capex spent.

Lower Sequential Losses

Sequentially, revenue fell 44.1% qoq to RM67.5m as 1Q is seasonally a weak quarter due to the monsoon season. However, core losses narrowed qoq to RM13.5m as PENB had incurred additional project costs in 4Q17. Associate profit declined 66% qoq due to the recovery of capex for production enhancement programme currently underway.

Downgrade to HOLD on Ongoing Concerns

We tweaked our FY19-20E earnings slightly to adjust our earlier working capital management assumptions. We lowered our EV/EBITDA multiple to 2x from 5x for its traditional business to reflect the de-rating over the concerns about the company at the shareholder level. We downgrade the stock to a HOLD with a lower SOTP-based target price of RM0.40 (from RM0.83). We believe with the heightened uncertainty surrounding the stock, investors should remain on the sidelines pending more clarity on the earnings recovery and concerns over macro developments. Key upside risks include: (i) higher work orders, (ii) higher oil prices, (iii) any recognition of variation orders and (iv) operating margin improvement. Downside risks include: lower work orders, margin compression and lower oil prices.

Source: Affin Hwang Research - 25 May 2018