PP 7767/09/2010(025354)

29 June 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts N o t e
29 June 2010
MARKET DATELINE

Kencana Petroleum Share Price

Fair Value
:
:
RM1.47
RM1.27
A Disappointing Quarter Recom : Underperform
(Downgraded)

Table 1 : Investment Statistics (KENP; Code: 5122) Bloomberg: KEPB MK

Net EPS Net
FYE Revenue Profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing GDY
July (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (x) (%)
2009 1,140.8 118.2 7.2 38.9 20.6 13.3 3.4 7.6 27.6 Net cash 0.6
2010f 1,188.8 131.4 8.0 11.3 18.5 8.0 3.0 12.7 15.7 Net cash 0.4
2011f 1,382.6 160.9 9.8 22.5 15.1 11.0 2.5 10.7 15.8 Net cash 0.5
2012f 1,550.0 181.9 11.0 13.1 13.3 12.0 2.0 9.4 14.7 Net cash 0.5
Main Market Listing / Non-Trustee Stock * Consensus Based On IBES Estimates

♦ Below expectations. 9MFY07/10 core net profit of RM94.3m (+7.2% RHBRI Vs. Consensus
yoy) was below our expectations, accounting for 55.8% and 67.3% of our Above
and consensus full-year estimates respectively. We note that 3Q revenue In Line
Below
was up 12.4% qoq and reflects the strong orders in hand, while gross
margins were sustained at 20% vs. 2QFY10 of 22% also reflecting a Issued Capital (m shares) 1,649.8
relatively robust flow of jobs. However, pre-tax profits were dragged Market Cap(RMm) 2,425.2
down by higher operating expenses. And while we still expect the 4Q to Daily Trading Vol (m shs) 3.9
be stronger, we believe our revenue assumptions for FY10-12 are now 52wk Price Range (RM) 1.015-1.75
overly optimistic. Major Shareholders: (%)
Khasera Baru 39.2
♦ Forecasts cut. We have thus cut our FY10-12 revenue projections by 11- Management 7.6
19% p.a., although we raised our corresponding EBITDA margin EPF 7.5
assumptions to 19.5% (from 18.0% previously). Overall, we have cut our
FYE July FY10 FY11 FY12
FY10-12 EPS forecasts by 21.9%, 16.8% and 14.7% respectively.
EPS chg (%) (21.9) (16.8) (14.7)
♦ Near-term concerns. The disappointing 3Q results will intensify the Var to Cons (%) (0.5) (11.3) (8.1)

market’s concerns about the slow pick up in oil & gas activity, despite the
PE Band Chart
12-month earnings visibility provided by Kencana’s orderbook of around
RM1.9bn. Delays in award of new fabrication contracts in the near term
could jeopardise earnings in FY12 and beyond.
PER = 20x
PER = 15x
♦ Drilling rig acquisition to provide a boost to FY11. Kencana’s PER = 10x
proposed acquisition of MKR1 would boost our FY11-12 earnings
forecasts. MKR1 owns a tender-assist drilling rig (built by Kencana and
currently undergoing final testing) which has already been awarded a
US$235m 5-year service contract from Petronas Carigali, and is scheduled
to begin operation in mid-Aug. We have not factored the acquisition into Relative Performance To FBM KLCI

our new forecasts as approvals are still pending. However, we note that
the acquisition would result in 8.2% uplift to our FY11 EPS estimate. Kencana Petroleum

♦ Risks. 1) Contracts in overseas markets that have higher execution risk;

2) Rising steel cost and other cost overruns; 3) Strengthening of RM
against US$; and 4) Delay in contracts if crude oil price pulls back. FBM KLCI

♦ Downgraded. While we remain positive on the long-term prospects for

the sector, we are concerned about the near-term visibility of contract
flows. Having lowered our FY10-12 EPS forecasts, our fair value estimate
has also been cut to RM1.27/share (from RM1.52 previously) based on Yap Huey Chiang
unchanged 13x FY11 PER (i.e. in line with the sector benchmark). We (603) 92802171
thus downgrade our recommendation on the stock to Underperform, yap.huey.chiang@rhb.com.my
from market perform.

Please read important disclosures at the end of this report.

Page 1 of 3

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 29 June 2010

Table 2. Kencana Quarterly Results

QoQ YoY YoY
FYE July (RMm) 3Q09 2Q10 3Q10 9M09 9M10 Comments
(%) (%) (%)
290.2 250.1 280.4 12.1 (3.4) 882.8 811.5 (8.1) Slight yoy decrease in revenue
Revenue
due to completion of contracts,
although revenue was still higher
qoq reflecting the orders in
hand.

41.1 47.7 43.4 (9.1) 5.6 129.5 138.9 7.2 EBITDA was disappointingly
EBITDA
lower qoq mainly due to higher
operating expenses.
14.2 19.1 15.5 14.7 17.1
EBITDA mrgn (%)
(4.8) (4.4) (4.6) 5.0 (3.1) (12.3) (13.3) 8.6
Depn and amort
36.3 43.3 38.7 (10.6) 6.7 117.2 125.5 7.1
EBIT
12.5 17.3 13.8 13.3 15.5
Margin (%)

(2.3) (3.2) (3.8) 20.7 66.8 (6.7) (9.6) 42.9

Int expense
0.9 1.3 1.6 22.5 73.5 3.1 4.0 29.6 3QFY10 cash levels fell to
Int inc
RM400m, from RM578m in the
2QFY10 due to higher working
capital as well as doubling in
capex and investments.
0.1 0.2 (0.0) n.m. n.m. 0.3 0.2 n.m.
Associates
35.1 41.7 36.5 (12.5) 4.2 113.9 120.1 5.5 Lower qoq due to higher costs.
Pretax
(7.4) (9.4) (5.4) (43.2) (27.8) (25.9) (25.9) (0.2)
Tax
21.2 22.6 14.7 (35.1) (30.7) 22.8 21.6 Lower than normal due to over-
Tax rate (%)
provision in prior years and
reinvestment allowance for one
of the subsidiaries.
- - - n.m. n.m. - 0.1 n.m.
MI
27.6 32.3 31.2 (3.5) 12.8 88.0 94.3 7.2 Qoq decline was partly mitigated
Net profit
by lower-than-expected tax
charge.
27.6 32.3 31.2 (3.5) 12.8 88.0 94.3 7.2
Core net profit
1.4 2.0 1.9 (3.5) 33.8 4.5 5.7 27.1
Core EPS (sen)
Source: RHBRI

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE July (RMm) FY09 FY10F FY11F FY12F FYE July FY10F FY11F FY12F
Fabrication 962.8 1,041.4 1,232.6 1,400.0 Key Drivers
EPCC 178.0 147.4 150.0 150.0 New orderbook (RMm) 630.0 974.0 1,400.0
Others - - - - Yard utilisation rate (%) 62.5 72.7 81.5
Revenue 1,140.8 1,188.8 1,382.6 1,550.0

EBIT 159.0 172.9 207.1 232.0

EBIT margin (%) 13.9 14.5 15.0 15.0 Source: Company data, RHBRI estimates
Interest expense (10.4) (13.1) (13.5) (13.8)
Associates 0.1 0.4 0.4 0.5
Pre-tax profit 152.8 168.4 206.3 233.3
Tax (34.5) (37.1) (45.4) (51.3)
Eff. tax rate (%) 22.6 22.0 22.0 22.0
Minorities - - - -
Net profit 118.2 131.4 160.9 181.9
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or
be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate

Page 2 of 3

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com
 29 June 2010

particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

Page 3 of 3

A comprehensive range of market research reports by award-winning economists and analysts are exclusively
available for download from www.rhbinvest.com