News  Puncak Niaga Holdings Bhd (Puncak) announced that its wholly-owned subsidiary, GOM Resources had been awarded one of the four packages (Package B) of the Pan Malaysian Integrated Offshore Installation Contract from Petronas.

 Package B (Pipelaying) involves transportation and installation of offshore facilities, which utilise its strong barge, DLB264, by eleven PETRONAS Production Sharing Contractors (PSCs). It will be a 3-year contract (2014 – 2016) with 1 year extension option.

 Petronas, in its website, reported that all four packages were worth RM10b. Besides GOM Resources, Petronas awarded contracts to other players such as Barakah (OP; TP: RM1.98) and SKPETRO (OP; TP: RM5.81)’s subsidiary, PBJV SB and TL Offshore SB.

Comments  This much-awaited news has finally materialized and we are POSITIVE on Puncak securing a piece of the action. We understand that the contract is the “continuation of soon-to beended OIC contract” from Petronas by end-2014. Basically, Petronas “refreshes” its contract by awarding this 3+1 year job.

 Based on its lift capacity of 1100 tonne, we assume Puncak’s portion is 25% - 30% of the RM10b or RM2.5b – RM3.0b. This would make up approximately RM700 – RM1.0b worth of orders per annum.

 Assuming 10% net margin (which they managed to deliver in FY12 with same job scope and client), Puncak could deliver net profit of RM70m – RM100m per annum.

Outlook  Puncak’s visible earnings from O&G segment offset the overhanging water consolidation issues (recent attempt by Selangor state government’s arm, KDEB to take over all the water concessionaires have been futile).

 Nonetheless, we believe the water consolidation is crucial for Puncak to move forward and further expand its lucrative O&G business. We believe besides a special dividend, part of the proceeds from its sale of water assets will be channelled to the O&G division.

Forecast  We are maintaining our forecasts numbers as we have already imputed in the continuation of the OIC jobs i.e. particularly this T&I jobs.

Rating Maintain MARKET PERFORM

 We believe Puncak can only be re-rated if KDEB, PAAB and all the water concessionaires reach an agreed “point” of pricing for their valuation of their assets and equities.

 On a flipside, on 12th December 2013, KDEB responded to Puncak’s letter, requesting for the extension of time to revert back to the latter with an appropriate response by end of this month. Should SSG accept Puncak’s terms and condition, we reckon Puncak will get more than what we have expected (i.e.> RM1.56b), hence further upside to our Target price.

Valuation  We revised our Target Price to RM3.50 from RM3.24, based on SOP-derived valuation (20% discount) after imputing higher target PER of 12.5x from 10x for Puncak’s O&G division in tandem with our O&G analyst’s upward revision of target PER for Barakah.

Risks to Our Call Prolonged water consolidation issues.

 Absence of special dividend.

 Absence of O&G jobs or lower-than-expected new contracts secured.

Source: Kenanga