News

Yesterday, BARAKAH received a Letter of Award (LOA) from Sarawak Steel Bhd and Sabah Shell Petroleum Bhd for the supply of operational pigs, pigging accessories and related equipment and services.

This involves the maintenance of the pipelines without disrupting the flow of products in the pipeline.

The duration of the LOA spans 3 years from 15th April 2015 with an option to extend further for another year.

Comments

It is not entirely a surprise to us as we have already factored in RM201.6m/RM266.3m revenue for its pipe commissioning segment for FY15/FY16.

We are of the view that this segment will be more resilient in the current challenging environment compared to its Offshore Transportation and Installation segment as pipe maintenance business is typically less sensitive to the industry cycles compared to other segments.

The announcement of its 2nd win to-date is a positive, but the contract value remains unknown as it is entirely dependent on the work orders to be issued by their client.

We believe the operating margin should be close to 15%, in-line with group’s 2014 average operating margin. Further upside in operating margin is limited, in our opinion, as operators look to cut their costs leaner in the low oil price environment.

Outlook

BARAKAH is likely to secure more short-term contracts compared to longer-term jobs due to the volatile crude oil prices and uncertainties in the industry.

However, we believe that oil majors will not reduce pipeline services and replacement works significantly as it is crucial for them to maintain a safe oilfield working environment.

Orderbook stands at RM1.8b which will provide earnings’ visibility for the group until 2018. However, timing and burn rate of the orderbook remains uncertain for 2015 as work orders might be slower than expected and back loaded to later years.

Excluding the tender book for the Arab Saudi project, BARAKAH is currently bidding for RM400m–RM600m worth of projects.

Forecast

We maintain our forecasts for now pending results announcement later today.

Rating

Maintain MARKET PERFORM

Valuation

Our Target Price is maintained at RM1.04, pegged to unchanged CY16E PER of 10x, pending announcement of 1Q15 results.

We have ascribed a premium over other small caps (7- 10x) in an industry down-cycle due to: (i) its status as a Pan-Malaysia contractor servicing 11 PSCs over the next three years, and (ii) robust orderbook in hand.

Risks to Our Call

(i) Slower-than-expected execution in the Pan Malaysia T&I project (ii) Lower-than-expected margins.

Source: Kenanga Research - 26 May 2015