News   Last Friday, Barakah Offshore Petroleum Bhd (BARAKAH) announced that it has received a Letter of Award from Petronas Carigali Sdn Bhd (PCSB) for the provision of engineering, procurement, fabrication, installation, commissioning, and maintenance works of a pipe inspection gauges (PIG) trap system.

  The contract duration is from 23 Jan 2015 to 22 Jan 2018 (3 years), with extension option of one year.

  No total contract value was announced as it depends on the work order from Petronas.

Comments   We are positive with this contract win as it shows the ability of BARAKAH in securing new contracts.   We understand that the estimayed contract value is approximately RM30m-RM35m p.a. with an EBITDA margin of 20%; which is in-line with the group’s blended EBITDA margin.

  This new win lifts BARAKAH’s order book to c.RM2.1b which provides earnings visibility for the next three years. Outlook   For the Pengerang Pipeline project, pipes have been delivered in early Nov 2014, hence earnings recognition from 1Q15 onwards is expected.

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

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

Rating Maintain OUTPERFORM Valuation   Our target price of RM1.34 is based on CY15 target PER of 10x.   We ascribed a premium over other small-cap stocks (7-9x) and we believe that our valuation is justifiable given that BARAKAH is one of the Pan Malaysian T&I winners which means that its orderbook would be relatively stable in the coming 1-2 years.

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