News  Yesterday, Barakah Offshore Petroleum Bhd (BARAKAH) announced that it has received a letter of award from GOM Resources Sdn Bhd for the provision of pre-commissioning services for 28” x 282km pipeline.

 The project is from onshore Kerteh Terengganu towards the border of Malaysia/Thailand Joint Development Area.

 The contract is expected to commence in 3Q14 and is expected to be completed by 1Q15.

Comments  We are positive with this contract win as it shows the ability of BARAKAH in securing new contracts. However, we notice that work will only commence in 2H14, which means revenue and contribution will only come in later on.

 The contract is estimated to worth approximately RM45m-RM50m with EBITDA margin of 20%-25% and brings BARAKAH ’ s secured order book to c.RM2.34b which provides earnings visibility for next three years.

Outlook  Management guided that 1H14 results could be seasonally lower due to the monsoon factor. However, things will pick up in 2H14 on the back of higher installation and construction activities and execution of the new contract.

 Arab Saudi T&I contract’s new submission date for the retender will be in May-14 which is contrary to our earlier expectations that it will be dished out by Feb-14. The award of this contract seems to be in Sep-14 with project commencement only by CY15.

 We understand that BARAKAH has been actively involved in bidding for new projects with its current tender book of

RM400m-RM600m (excludes tender book for Arab Saudi).

 Additional growth for the T&I segment will hinge on BARAKAH’s future asset expansion. We understand that the company may expand the asset base in line with the expansion in contracts awarded.

Forecast  As most of the contracts will only commence in 2H14 (due to later execution of the Pan-Malaysia T&I and later win for newer contracts), we have reduced: (i) FY14-15E revenue recognition to RM632.5m and RM850.0m from RM846.2m

and RM940.0m, respectively and (ii) FY14E EBITDA margin to 20.1% from 20.4% previously.

 Overall, we are cutting our FY14-15E net profits by 34.5% and 11.5% to RM73.1m and RM115.8m, respectively.

Rating Maintain OUTPERFORM

 We are still positive despite the cuts given: (i) the significant 15.5% upside for share price to our new target price and (ii) its still trading at attractive discount to small-and-mid-cap peers (ie. UZMA (CY15 PER: 13.1x) and ALAM (CY15 PER: 10.1x)).

Valuation  Our new target price of RM1.74 (previously RM1.98) is based on an implied target PER of 13x on CY15 EPS of 13.4 sen.

 We believe our valuation for BARAKAH is still reasonable as we are valuing it at a 13.3% discount to the 15.0x PER ascribed to industry peers such as ALAM (OP; TP: RM2.07) given its smaller asset base (it currently owns only one pipelay support vessel).

Risks to Our

Call

 (i) A downturn in the oil & gas sector could result in delays in contract rollouts.

 (ii) Delay in the Pan-Malaysia’s T&I project execution, which will reduce the potential earnings being factored in our forecasts.

 (ii) Lower-than-expected margins.

Source: Kenanga