Kencana Petroleum Bhd is poised to take over Labuan Shipyard and Engineering Sdn Bhd, a wholly-owned subsidiary of Umno-linked Realmild Sdn Bhd, sources say.

The takeover is believed to be part of Kencana’s efforts to beef up its facilities to qualify for a RM3.8 billion contract to be awarded by Petroliam Nasional Bhd or Petronas.

The four-year contract is for the top-side maintenance of oil rig platforms as well as hook-up and commissioning services for all of Petronas’ oil rigs in the peninsula as well as Sabah and Sarawak. It is expected to be broken into four parts.

Kencana is said to be among the four companies that have been shortlisted for consideration for the RM3.8 billion job. The other three are Petra Energy Bhd (PEB), Dayang Enterprise Holdings Bhd and privately held Carimin Sdn Bhd.

Labuan Shipyard operates what it claims on its website to be the largest fabrication yard in Borneo, with a covered workshop ratio of 1.2:2.

Currently, Realmild is leasing the fabrication yard from the Ministry of Finance (MoF) for RM7 million a year. It has been reported that Labuan Shipyard is underutilised and like most other fabrication yards, is not performing well due to excess capacity in the industry.

Nonetheless, Labuan Shipyard has good facilities and has gained the interest of many in the past, including conglomerate Sime Darby Bhd. A source says the yard has the facilities to handle repair works, which is the bread and butter of fabrication yards.

Labuan Shipyard & Engineering was incorporated in September 2005 and took over the facilities, operations and all business activities of Sabah Shipyard Sdn Bhd, which has since been liquidated.

It is unclear whether Kencana will be leasing the fabrication yard from Realmild or taking over the existing lease, effectively leasing the asset directly from MoF. Sources say it may even buy over the fabrication yard from the ministry.

Kencana needs the Labuan fabrication yard because it does not own any in Sabah and Sarawak. It only has a fabrication yard in Lumut, Perak, at the moment.

It is understood that under the Economic Transformation Programme (ETP), jobs will be given to companies that have the assets and technical expertise to handle them to avoid having to split a contract into sub-contracts.

PEB has a fabrication yard in Labuan while Dayang Enterprise has two fabrication yards, one in Labuan and the other in Terengganu. Both companies have sufficient support vessels.

According to its website, Carimin has businesses in fabrication, upgrading, retrofit, maintenance, hook-up and commissioning of oil and gas structures and facilities. A check with the Companies Commission of Malaysia shows that Carimin has an authorised capital of RM1 million. Its shareholders are Cipta Pantas Sdn Bhd (51%) and Mokhtar Hashim (49%), who is also a director in the company. Another director of Carimin is Tan Sri Kamaruzzaman Shariff, who holds directorships in listed companies such as Bintai Kinden Corp Bhd.

Kencana’s current order book stands at RM1.6 billion, comprising RM800 million worth of fabrication jobs and RM800 million from its newly acquired rig MKR-1.

MKR-1 commenced operations early last month. To recap, the rig, currently deployed off Sabah’s shores, has secured a five-plus-five-year long-term contract from Petronas at an average charter rate of US$125,000 a day.

OSK Research, in a recent report, says revenue contribution to 1QFY2011 ending Oct 31 by  MKR-1 would be about RM20 million based on a utilisation rate of 85%. The research house expects an Ebitda margin of 25%, although it notes that management says it is possible to achieve margins in the range of 30% to 35%.

For FY2010 ended July 31, the group posted a net profit of RM135.8 million — an increase of 15% y-o-y. This was attributed to the fabrication of higher margin products as the company moved up the learning curve for product fabrication as well as better cost management. Revenue, nonetheless, slipped 5% to RM1.1 billion.

Kencana is a favourite among analysts. Of the eight research houses covering the stock, seven have a “buy” call on the counter with an average target price of RM1.97. Kencana has been climbing since end-May, closing at RM1.66 last Friday. The stock has risen some 16% YTD.
OSK maintained its target price for Kencana at RM2.06 based on existing PER of 16 times CY2011 EPS.

Kencana could potentially benefit from the expected listing of Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) as it may present a potential re-rating catalyst for the oil and gas sector, which has been a laggard despite the broad rally on the equity market.

“We believe there is a potential share price re-rating on the stock in the event MMHE is listed at a high PER valuation since both companies have a good track record in their fabrication business. Kencana remains our top pick for the O&G sector,” OSK says.

AmResearch notes that the government has plans to groom local fabricators to be able to effectively compete in the regional arena. This could mean that news flow on mergers and acquisitions could resurface for Kencana, further catalysing a re-rating on the stock, it  says in a report.

This article appeared in Corporate, The Edge Malaysia, Issue 826, Oct 4-10, 2010