Downgrade: Bad News Not Over

Petra Energy (PENB) reported weak 2Q18 earnings, which missed both our and consensus estimates. While we understand that the visibility on Petronas’ work programme has improved, PENB continues to face setbacks on the timing of recognition of work orders. In view of the looming uncertainties over the near term, we are downgrading the stock to SELL (from BUY) with a lower 12- month target price of RM0.37.

Missed Expectations

2Q18 revenue fell 13% yoy to RM88.4m due to fewer hook-upcommissioning jobs executed in 2018. This, coupled with the lower associate profit (-73% yoy), as a result of lower production volume for the KBM RSC, led to a core net loss of RM14.2m.

Losses Widened Sequentially

PENB’s 2Q18 core net loss widened by 5% qoq to RM14.2m despite recording a 31% increase in revenue. This was due to the initial mobilisation cost incurred for the manpower and vessels needed for the recently awarded maintenance, construction and modification (MCM) contract. Sequentially, associate profit was flat despite the higher oil price environment, due to the recovery capex for a production enhancement programme that PENB underwent.

Downgrade to SELL Post Cuts in Earnings Foreasts

We cut our FY18 earnings forecast and project a full-year loss as the 2H18 outlook may not be as rosy as previously guided, due to the constant delay in work orders. We are also taking a more cautious stance on its FY19-20 outlook, lowering our EPS forecasts by 22-27% on lower work orders. While the FY19 PE multiples may appear attractive, earnings risk is to the downside, in our view. We lower our SOTP-based target price to RM0.37 (from RM0.59), and downgrade PENB to SELL. We caution investors on the heightened uncertainty surrounding the stock, and advocate remaining on the sidelines until more clarity appears over an earnings recovery. Key upside risks include: (i) higher work orders, (ii) higher oil prices, (iii) any recognition of variation orders, and (iv) operating margin improvement.

Source: Affin Hwang Research - 3 Sept 2018