We see earnings risk for PENERGY in its traditional “bread and butter” business as we anticipate potential slowdown in hook-up commissioning (HUC) orders from Petronas’ Pan Malaysia project despite being cushioned by earnings from KBM cluster, RSC. As its share price had rallied 26% from YTD’s low of RM1.00, we believe the ear-term downside risk is high on potential earnings disappointment for FY16. Not-Rated call on the stock with a FV of RM1.30 pegged to CY17 PER of 8x.

Possible slowdown in Pan Malaysia contracts. Despite PENERGY having an outstanding orderbook from Pan Malaysia contract of c.RM1.6b up to 2018, we believe HUC works are likely to fall substantially this year in view of Petronas’ initiatives to trim budget for cash. On the other hand, topside major maintenance (TMM) works, in our view, are less affected given the importance to maintain oil production from these brownfields. As a result, we forecasted PENERGY’s revenue to fall 33% in FY16 but to recover 36% in FY17 from a much lower base assuming Pan Malaysia works are resumed by Petronas which will only be known in 1Q17.

Buffering from associate income from KBM cluster. PENERGY started to register strong earnings in 3Q15 subsequently to the full reimbursement of development and production CAPEX and OPEX. Assuming oil prices averaged at USD45/bbl this year, our back-of-envelope calculation suggests that the remuneration fees to be collected by PENERGY will drop c.17% YoY to RM42.4m. We reckon the KBM cluster is able to operate at low operating costs but do not discount the possibility of more development plans needed to ensure sustainable production in the future.

Impairment/provisions in sight on marine assets and trade receivables. In view of challenging operating environment, we opine PENERGY will impair its marine assets (forming bulk of its PPE) especially on its work barges, which are off-hired since last year. In addition to that, we noticed that its trade receivables due more than 91 days without impairment have ballooned to RM26.8m in FY15 from RM16.0m a year ago. Thus, in our view, it is likely for PENERGY to provide higher impairment allowance on the incremental amount.

Our FY16/FY17E earnings are 34%/15% lower than the streets’. Excluding impairment/provisions, our earnings forecast of RM31.3m for FY16E is 34% lower than consensus accounting for: (i) slower work orders from Pan Malaysia contract, and (ii) lower associate earnings contribution. Our FY17E earnings forecast of RM52.3m is also 15% weaker than the street assuming the following assumptions: (i) similar activities level in their core business as FY15 (both HUC and TMM work oders from Pan Malaysia are carried out accordingly), and (ii) average oil prices of USD51/bbl.

Stable balance sheet but lower dividends in the pipeline. Despite the potential impending earnings disappointment risks, PENERGY has low net gearing of 0.23x vs. industry average of 0.60x. We do not foresee PENERGY having immediate cashflow problems given: (i) its solid cash pile of RM213.5m as at 4Q15, (ii) successful debt restructuring to delay loan repayment, and (iii) steady cash flow from RSC KBM cluster. Having said that, PENERGY is likely to lower its dividend distribution to shareholders in view of challenging operating environment and potential CAPEX commitment in the next two years. We estimate a DPS of 2.0 sen for the next two years.

Not-rated call with FV of RM1.30 pegged to CY17 PER of 8.0x, implying a 25% discount to its book value. The valuation is inline with its down-cycle average PER of 8x for small-medium caps within the sector. As its share price had rallied 26% from YTD low of RM1.00, we believe the near-term downside risk is high on potential earnings disappointment risk for FY16 unless oil prices continue its uptrend with a stronger-than-expected performance. 

Source: Kenanga Research - 17 May 2016