Kencana ... Apr12

Alliance Research ...

Inline, waiting on the merger
Kencana Petroleum has had a strong showing for 1HFY12 results. The group achieved 65% earnings growth on the back of contributions from the KM1 drilling rig as well as new subsidiary, Allied Marine and Engineering. We continue to be positive on the upcoming merger with SapuraCrest and maintain our Strong Buy call on the group.

Above consensus, mildly above house
 Kencana Petroleum’s 1HFY12 earnings were within house expectations making up 52% of our full year estimates. However, earnings beat consensus estimates making up 59% of full year expectations.

 Earnings are coming through strong this year (6MFY12 net profits +65% y-o-y) as the group is recognising contributions from the now 100% owned KM1 tender assisted drilling rig. Besides that, the purchase of Allied Marine and Engineering (AME, subsea services with diving support vessels) is also making maiden contributions this year as the acquisition was only completed last July. Both AME and the KM1 rig now contribute about 31% of group PBT. The remainder of earnings of the group continues to be driven by fabrication projects.

 As for the Berantai Marginal field project, the group reported a small profit of RM0.5m for the quarter. A mild loss of RM6.9m was seen over 1HFY12 and this included cost incurred for the on-going merger exercise. We believe that the Berantai project will see more positive contributions next year when the FPSO is ready and production commences.
Waiting on the merger

 We continue to look forward to the upcoming merger between Kencana Petroleum and SapuraCrest Petroleum. Management continues to assure that the merger is on-going but is being held back due to some administrative issues. That said, the current timeline for completion appears to be by the end of April.

 We reiterate again that we are positive on the prospects of the soon-to-be listed merged entity, Sapura Kencana Bhd (SKB). The company will be the largest Asian integrated offshore services provider with a solid RM13bn orderbook. A stronghold of installation assets, drilling assets and fabrication track record will provide it with steady recurring income as well as growing profits as they take on larger projects. We have prospective TP of RM2.40 for SKB with a 4-year growth CAGR of 23%.
Valuation and recommendation

 Based on our target price of RM2.40 per SKB share (derived from 20x P/E on CY12 earnings) and RM0.49 cash consideration per Kencana share under the merger, the implied 12-month target price for Kencana is RM3.50, suggesting a 11.2% upside potential from current share price. Over a 2-year period, we expect an upside of 34%, justifying our STRONG BUY.