Period  Jul14-Sep14/12M14

Actual vs. Expectations BARAKAH reported core net profit of RM28.4m for the period Jul14-Sep14 which brought 12M14 core net profit to RM62.4m. This made up 85.4% and 79.0% of our full-year forecast and consensus forecasts (for a 15-months period) of RM73.1m and RM79.0m, respectively.

 The result is above our and consensus expectations. The variance from our forecasts is due to higher billing from pre-commissioning works and Pan Malaysia T&I Package A projects.

 BARAKAH’s 12M14 core net profit was restated by management for: (i) the one-off gain on disposal of subsidiary Vastalux Energy Bhd, (ii) one-off impairment loss on goodwill, (iii) IPO listing expenses, and (iv) bad debts written-off.

 We highlight that BARAKAH has changed its FYE to December from September effective Jan-14. Thus, our FY14 forecast is for a 15-month period from Sep-13 to Dec-14.

Dividends  No dividend was declared as expected.

Key Results Highlights Core net profit for the period Jul14-Sep14 surged by >100.0% QoQ on the back of 60.3% increase in revenue and better margins. The increase in revenue is mainly due to: (i) completion of 2 pre-commissioning works, and (ii) higher revenue recognised from on-going T&I, EPCC and Hook-up Commissioning works. Net margins grew by +3.4pts; largely as the Apr14-Jun14 quarter was besieged by higher mobilisation costs as they had to mobilise for their current projects.

 The core net profit grew >100.0% YoY to RM28.4m, mainly due to the commencement of: (i) Pan Malaysia T&I projects that commenced in June-14 and (ii) other on-going Onshore Engineering, Procurement, Construction and Commissioning (EPCC) projects.

Outlook  Offshore Pan Malaysia works is expected to carry on until end of Nov-14, while onshore Pan Malaysia works is expected to commence from Dec-14 to Apr-15.

 For the Pengerang Pipeline project, pipes have been delivered in early Nov-14, hence earnings recognition from 1Q15 onwards is expected.

 Still no news on the Arab Saudi T&I tender, but there has been no sign of disqualification by the client. At this juncture, management believes work could only commence only by 2016.

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

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

Change to Forecasts We upgrade our FY14 forecasts to RM84.2m (+15.2%) as we expect higher revenue recognition (increased our revenue forecast to RM697.5m (+10.3%)) from pre-commissioning works and Pan Malaysia T&I Package A projects in the upcoming quarter.

 We maintain our FY15 forecasts for now; given the uncertainty in contract phasing for the next year.

Rating Maintain OUTPERFORM

Valuation  We trim our target CY15 PER on BARAKAH to 12x (from 13x previously) due to: (i) current sluggish crude oil prices, and (ii) Petronas’ cautionary statement on reviewing CAPEX allocation for 2015.

 Our ascribed PER is 20% above the 10x historical -1 standard deviation level for oil and gas stocks, as we believe BARAKAH deserves a premium for being a Pan Malaysia T&I contractor that gives it certainty in the eventuality of contract roll-outs.

 Post our PER cuts, the new TP is RM1.62 (from RM1.74 previously).

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