KENCANA by OSK

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THE BUZZ
Yesterday Kencana announced that its 100%-owned subsidiary, Kencana HL SB, has secured a contract from Kebabangan Petroleum Operating Company SB for the fabrication of Kebabangan substructure for Kebabangan Northern Hub Development Project. The job scope includes the construction engineering, procurement, fabrication, inspection, testing and commissioning, loadout and seafastening (EPC) of the structures. The contract, worth about RM208m, is expected to be completed by 3QCY12.

OUR TAKE

Contract within expectations. Earlier, we had gathered that Petronas had been in the midst of awarding contracts for this oilfield except we were unsure of the timing of the award since Petronas’ current focus is mainly on marginal oilfields. However, when the contract was ready for award, we had expected Kencana to win at least a portion of it given the company’s delivery track record and available yard space. Currently, we understand that Kencana’s utilization rate had recently increased to about 60% but there is still ample room to take on more jobs.

No change to our FY11-12 earnings. This is because we had earlier assumed some orderbook replenishment for the company based on the guidance from its management. Orderbook should increase to about RM2.4bn. This robust orderbook is expected to keep the company busy for the next 2 years. Meanwhile, Kencana’s tenderbook totals about RM5.0bn.

Maintain Trading Buy. Our fair value for the stock remains unchanged at RM3.05, based on the existing PER of 23x FY12 EPS. Kencana, which we favour for its delivery track record, remains one of our top picks for the O&G sector. We believe the timing for another re-rating of its share price would happen sometime in 4QCY11, when there is more guidance from management on the potential contribution from the Berantai marginal field.