We met with Petra Energy’s Management recently and understand that it is set to recover from patchy earnings over the last two years. While prospects are expected to remain benign in FY13, investors can look forward to a better FY14. In view of its weaker outlook in the near term, we downgrade the stock to a NEUTRAL. Our MYR1.60 FV is pegged to 15x FY14 EPS and includes our DCF valuation for its marginal oilfield.

¨      Benign prospects in FY13. We understand that FY13 will likely be a muted year for Petra Energy (PENB) due to the lack of major jobs secured recently. That said, our projected revenue and earnings growth for FY13 is likely achievable if it secures a sizeable contract for the Pan-Malaysia hook-up commissioning (HUC) tender.

¨      Strong contender for upcoming Pan-Malaysia HUC tender. While the chances of Petra Energy winning the contract remain uncertain at this juncture, we believe that the company could potentially secure at least MYR1.2bn worth of jobs in the Pan-Malaysia HUC tender, which may translate into an annual orderbook replenishment of MYR240m moving forward.

¨      Accelerating marginal oilfield developments. We understand that development efforts for its marginal oilfield (Kapal, Banang and Meranti) are intact and the company is set to accelerate its development efforts. The company’s capital expenditure for the marginal oilfield will be reimbursed by Petronas once production commences. Heightening development efforts would also potentially quicken Petronas’ reimbursement and reduce the interest expenses incurred. Nonetheless, we are factoring in higher interest expenses of MYR10.5m and MYR16.5m for FY13 and FY14 respectively for now.

¨      Downgrade to NEUTRAL. With the company’s FY13 prospects expected to remain benign, we are downgrading the stock to a NEUTRAL. Nonetheless, we advocate investors to invest on share price weakens as FY14 will be better for the company, underpinned by: i) a contract win in the Pan-Malaysia HUC tender, ii) operational improvements should translate into better net margins, and iii) faster-than-expected developments in its marginal oilfield venture. Our MYR1.60 FV is pegged to 15x FY13 EPS and includes a DCF valuation of Petra Energy’s marginal oilfield worth MYR0.23.

Source: RHB