News  Yesterday, Barakah Offshore Petroleum Bhd (BARAKAH) announced that it has entered into an agreement with Lundin Malaysia B.V (LUNDIN) for the provision of hookup, commissioning and topside major maintenance services.

 The contract duration is from 14 August 2014 to 4 February 2016.

Comments  This is BARAKAH’s fourth win for the year and we are positive on this development as it shows BARAKAH’s ability to continue winning contracts.

 There has no total contract value announced for this win as it depends on the work order from LUNDIN from time to time.

 Management guided that the first work order from this contract is worth c.RM30m for a period of six months and EBITDA margin for this contract could be in the range of 20%-22%; which is in-line with the group blended EBITDA margin.

 This new win lifts BARAKAH’s order book to c.RM2.31b which provides earnings visibility for the next three years.

Outlook  Profit recognition is expected to pick up in 2H14 on the back of higher installation and construction activities and execution of the Pan Malaysia new contract from Jun-14.

 The Pengerang Pipeline project contract value has been revised to RM260.0m (versus RM130.0m previously) as BARAKAH is now the main contractor (versus being a subcontractor previously). Management expects the job to start as soon as Sep-14, with earnings recognition from Oct-14 onwards.

 Arab Saudi T&I tender is still on track for awards by Sep-14 with project commencement only by 2015. Excluding the tender book for the Arab Saudi project, we understand that BARAKAH is actively bidding for c.RM400m-RM600m worth of projects.

 Additional growth for the T&I segment will hinge on BARAKAH’s future asset and geographical expansion. From a geographical standpoint, it mentioned Vietnam and Brunei as potential regional bases for expansion.

 Interestingly management also hinted they are open to moving to the E&P space.

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

Rating Maintain OUTPERFORM

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: RM2.10) given its smaller asset base (currently it owns only one pipe-lay support vessel).

Risks to Our Call (i) 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