Barakah Offshore Petroleum Bhd
(March 18, 90 sen)
Upgrade to market perform from underperform with a higher target price of RM1.04 from 78 sen: We recently met with Barakah Offshore’s management and came away with a clearer picture of the industry dynamic and the company’s prospects.

We believe the company may secure slightly more pipeline servicing and replacement contracts. In view of the more optimistic assumptions, we have adjusted our financial year 2015 (FY15) and FY16 earnings forecasts by 20% and 7% to RM81 million and RM90.1 million, as opposed to RM67.2 million and RM84 million previously, on the back of higher pipeline operations performed. 

To recap, Barakah recorded 15-month financial year 2014 (15MFY14) core net profit of RM88.6 million on the back of the completion of several pre-commissioning jobs, commencement of Pan Malaysia transport and installation (T&I) projects since June 2014 and other ongoing onshore engineering, procurement, construction and commissioning projects with a lower earnings before interest and tax (Ebit) margin. 

Management clarified that the lower Ebit margin was mainly due to front-loaded administration expenses, due to ramped-up manpower force from 250 in 2013 to 470 in 2014, in preparation for the Pan Malaysia projects in early 2014. 

Moving forward, in the absence of such costs, a better Ebit margin is expected with blended earnings before interest, taxes, depreciation and amortisation margin to improve to 18.4% in FY15 against 16.8% in 15MFY14.

We are convinced that oil majors are unlikely to reduce pipeline servicing and replacement works significantly even in a lower oil price environment due to working environment safety issues.

Thus, we feel more confident of Barakah’s earnings prospects, as it might be less impacted by major contract slowdowns. As such, we expect Barakah to secure some pipeline servicing and replacement contracts, which could be short-term in nature.

With the recent pig trap system contract win, its unbilled order book stands at RM2 billion. This will provide earnings visibility for the group until 2018. Excluding the tender book for the Arab Saudi project, we understand that Barakah is actively bidding for RM400 million to RM600 million worth of projects.

Risks to our call include slower-than-expected Pan Malaysia T&I project execution and lower-than-expected margins. — Kenanga IB Research, March 18

This article first appeared in The Edge Financial Daily, on March 19, 2015.