News  Yesterday, Barakah Offshore Petroleum Bhd (BARAKAH) announced that, in a consortium with CPM Construction Sdn Bhd, it has received a letter of award from Petronas Gas Berhad (UP; TP: RM21.54) for the procurement, construction and commissioning of Pengerang Pipeline.

 The contract is expected to commence immediately and is expected to be completed by 2Q16, in total of 26 months.

 The value of the contract is estimated at RM260m and BARAKAH has 50% share in the contract.

Comments  This is BARAKAH’s 2nd win for the year, taking its cumulative wins to RM170m for FY14.

 While this is a positive development; the contract value is relatively immaterial (RM130m versus current order book of RM2.34b) which is also within our expected contract win rate of RM220m for FY14. Moreover, we understand that the profit on this contract will be back-loaded as the bulk of the profit will only start in FY15.

 We estimate the contract will yield an annual pretax profit of RM9.8m to BARAKAH based on a pretax margin of 15%.

 The new win lifts BARAKAH’s order book to c.RM2.47b which provides earnings visibility for the 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 in contrast to our earlier expectations that it will be dished out by Feb-14. The award of this contract is likely to be in Sep-14 with project commencement only by CY15.

 Excluding the tender book for the Arab Saudi project, we understand that BARAKAH is actively bidding for c.RM400m-RM600m.

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

Forecast  We are maintaining our forecasts numbers as we have already imputed the wins in our order book assumption.

Rating Downgrade to MARKET PERFORM from OUTPERFORM

 Given lower upside of 8.1% to current share price, we are downgrading our call to MARKET PERFORM. We believe that new wins will be muted for now until project in Arab Saudi comes into play.

Valuation  Our target price of RM1.74 is based on CY15 target PER of 13x.

 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 pipe-lay 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