Barakah Offshore Petroleum Bhd
(Oct 8, RM1.33)
Maintain “buy” with target price (TP) of RM1.95: Barakah Offshore Petroleum’s order book stood at a healthy level of RM2.31 billion as at end-September 2014, which will last until 2018.

The management also guided that the company has so far received work orders worth RM600 million for its Pan Malaysia transportation and installation (T&I) contracts. Barakah’s Kota Laksamana 101 (KL101) pipelay barge was only mobilised at end-May 2014 and has completed two out of the four assigned jobs for 2014. We are expecting the T&I division to generate RM35 million to RM40 million profit in the second half of 2014. Management guided that KL101 would be able to meet the work requirement for 2014 and it does not see any difficulty in chartering a pipelay barge should work orders ramp up in 2015.

We gather that Barakah is currently studying the feasibility of venturing into a risk-sharing contract (RSC). While a RSC could be lucrative, Barakah is taking a prudent approach by looking for a good partner with decent financial strength. Applying the same assumptions that we use on other RSCs (US$100 million to US$300 million capital expenditure, Barakah to own a 30% stake, internal rate of return of 15% to 18%), we estimate the net present value of the RSC could further enhance our valuation on Barakah by RM0.05 to RM0.08/share on a fully-diluted basis.

Based on the work orders received so far, the management said that Barakah does not need a third-party pipelay barge to perform the Pan Malaysia T&I jobs in 2014. The management said that there were a few readily available pipelay barges from other local services providers, such as Alam Maritim Resources Bhd and Perisai Petroleum Teknologi Bhd. Hence, we believe our operating margin assumption of 14% to 15% would be intact.

The management also guided that the company does not intend to invest in assets for now, especially offshore support vessels. While executing T&I works would require the usage of at least two anchor-handling tug supply vessels and one work barge, these assets are readily available on spot charter. The charter rates of these assets are also fairly stable over the last few months, although the ample supply of these assets on the domestic front could put downward pressure on future charter rates.

The outcome of Saudi Aramco’s re-tender contract (comprising T&I, hook-up and commissioning, and pipeline commissioning works) is expected to be known by next year after the tender closed on June 9. The management mentioned that Barakah and its joint-venture partner are competing with the same two contenders in the previous round of bidding, which includes the incumbent contractor.

When asked about dividends, the management guided that the company is still in a growth phase. Hence, the management is not adopting a dividend policy for now but does not rule out the possibility of paying some dividends, if possible.

We maintain “buy” and a TP of RM1.95, pegged to 14 times fully-diluted financial year forecast price-to-earnings ratio (PER) (we assume full conversion of redeemable convertible unsecured loan stocks and the exercise of employee share option scheme). Our TP PER is conservative as it is at a 15% discount to the sector’s 16.5 times. We believe a rerating could take place if the company is able to execute its order book. Assuming the stock rerates to the sector average, our TP could rise to RM2.24. — UOB KayHian, Oct 8

This article first appeared in The Edge Financial Daily, on October 9, 2014.