From our recent meeting with Petra Energy (PENB), we understand that its  turnaround  strategies,  which  will  enhance  the group’s net profit margins, will likely bear fruits in FY14. We expect FY13 net profit margin to  remain  benign  given  the  legacy  projects,  which  are  low  in  margins, but expect FY14 to be stronger on various initiatives. With some 13.0% upside to our fair value, we upgrade PENB to a BUY. 
 
- Margins likely to stay benign in 2013. We note that PENB’s net profit margins  are  expected  to  remain  benign  in  2013  given  that  the  legacy projects,  which  are  low  in  margins,  will  remain  in  its  orderbook  till  end-2013.  That  said,  we  understand  from  Management  that  net  profit margins  are  expected  to  improve  significantly  in  2014  due  to:  i)  better pricing  model  for  its  recent  hook-up  commissioning  (HUC)  and  topside maintenance  contract,  ii)  potential  subsea  contract  win  later  this  year, and iii) bareboat charter of its four work barges.

- Entry into the subsea business a positive. Recall that PENB acquired a  51%  stake  in  Bumi  Subsea via  its  100%-owned  vehicle, PE  Ventures in July.  Bumi Subsea is tendering for jobs worth more than MYR1bn in this  business  segment.  PENB  is  partnering  Bourbon,  global  player  in offshore oil and gas marine services, for the latter’s technical expertise.  

- Four  works  barges  available.  Four  of  PENB’s  work  barges  are currently  being  marketed  for  bareboat  charters.  While  Management  is unsure  if  it  would  dispose  of  one  or  two  of  these  vessels,  we  estimate that each vessel could potentially contribute some USD4m per annum in revenues  if  successfully  chartered  out.  Management  aims  to  charter these vessels out before the end of 2013.

- Upgrade to BUY. All in, we see catalysts in the form of order wins and recovery of investor confidence in the stock once the worst is proven to be  over.  In  line  with  our  earnings  upgrade,  we  upgrade  the  stock    to  a BUY  from  NEUTRAL,  with  a  revised  fair  value  of  MYR2.70  (previously MYR2.34).  Our  fair  value  is  pegged  to  15x  of  its  FY14  earnings  and includes a DCF for its marginal oilfield worth MYR0.23 per share.

Source: RHB