Strong Selective Sectoral Themes

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1 Sector Update, Integrated Oil & Gas Strong Selective Sectoral Themes Overweight (Maintained) Macro Risks Growth Value Malaysia O&G universe 4QCY13 financial ratios 4QCY13 (Conventional) Debt/ asset Cash/ asset Alam Maritim n.a. n.a. Bumi Armada 31.9% 7.2% Coastal Contracts 0.5% 20.6% Daya Materials n.a. n.a. Dayang Enterprise n.a. n.a. Dialog 7.2% 15.4% Favelle Favco 0.5% 15.4% MMHE n.a. n.a. Muhibbah Engineering 0.2% 16.1% Perdana Petroleum 44.1% 5.2% Perisai Petroleum Teknologi 23.8% 4.4% Petra Energy 2.5% 12.6% Petronas Chemicals n.a. n.a. Petronas Gas 6.4% 6.9% SapuraKencana Petroleum 32.9% 5.2% Wah Seong 30.4% 15.2% Yinson Holdings 50.2% 12.9% Source: RHB estimates, companies data *Please see Page 4 for our assumptions. The actual financial ratios may be reasonably higher than our assumptions Kong Ho Meng kong.ho.meng@rhbgroup.com The Research Team research2@rhbgroup.com We maintain OVERWEIGHT with selective sectoral themes. While sentiments remain strong on RAPID, EOR and RSC, we believe RSC is an overplayed theme in the small-cap space and expect interest to wane once news flow becomes more fluid. More trading opportunities may arise from the next shariah compliance review. Our top BUYs are SapuraKencana Petroleum, Dayang, Coastal Contracts and Wah Seong. PIC gets nod. Petronas approval of the Pengerang Integrated Complex (PIC) project last week did not surprise the market. We believe Muhibbah Engineering will be a major beneficiary of this development. Other potential beneficiaries are Dialog, Petronas Chemicals, KNM (KNMG MK, NR), Barakah Offshore Petroleum (BARAKAH MK, NR) and Malaysia Marine and Heavy Engineering (MMHE). EOR theme remains strong. The production sharing contractors are determined to develop s, mainly centred around enhanced oil recovery (EOR) efforts. Petronas has five EOR projects in the pipeline. Other than the offshore structure fabricators like SapuraKencana, MMHE and TH Heavy Engineering (RH MK, NR), chemical injectant suppliers such as Dialog may benefit from such efforts by Petronas. RSC an overplayed theme. While share prices of small-cap risk service contract (RSC)-related players such as Uzma (UZMA MK, NR) and Scomi Energy Services (SES MK, NR) had an incredible run in CY13, we believe premiums for such stocks will wane once news flow on RSCs becomes more fluid. Uzma s recent price correction is a testimony that market expectations have been priced in. Potential changes in shariah status. The next shariah-compliant stock list update in May 2014 could see some changes. Our simulation (see left exhibit) identifies five companies that are approaching/have exceeded the 33% limit of conventional cash/debt-to-asset ratios. Bumi Armada and Yinson are currently non-shariah-compliant, while Wah Seong, SapuraKencana and Perdana Petroleum are shariah-compliant stocks. Maintain OVERWEIGHT. Our Top Picks are SapuraKencana, Dayang, Coastal Contracts and Wah Seong. P/E (x) P/B (x) Yield (%) Company Name Price Target Dec-14F Dec-14F Dec-14F Rating Alam Maritim MYR1.42 MYR BUY Bumi Armada MYR3.97 MYR BUY Coastal Contract MYR4.96 MYR BUY Daya Materials MYR0.32 MYR NEUTRAL Dayang Enterprise MYR3.75 MYR BUY Dialog MYR3.67 MYR BUY Favelle Favco MYR3.86 MYR NEUTRAL Malaysia Marine and Heavy Enginee MYR3.82 MYR NEUTRAL Muhibbah Engineering MYR2.88 MYR BUY Perdana Petroleum MYR1.90 MYR NEUTRAL Perisai Petroleum Teknologi MYR1.61 MYR BUY Petra Energy MYR2.48 MYR NEUTRAL Petronas Chemicals MYR6.81 MYR NEUTRAL Petronas Gas MYR24.00 MYR NEUTRAL SapuraKencana Petroleum MYR4.45 MYR BUY Wah Seong MYR1.86 MYR BUY Yinson Holdings MYR8.86 MYR BUY Source: Company data, RHB estimates See important disclosures at the end of this report Powered by EFA TM Platform 1

2 Oil & Gas: Strong Selective Sectoral Themes RSC is already an overplayed theme. Time to take profit and wait for project execution Time to take profit on selected small-cap stocks After a long drought of news on RSCs in CY13, market interest in marginal oil is once again rejuvenated upon the announcement of two recently-signed contracts. The Uzma and EQ Petroleum Developments Malaysia SB 30%:70% joint venture (JV) has been awarded a contract to develop Tanjung Baram, off Lutong in Sarawak. Petronas wholly-owned marginal expert Vestigo Petroleum was awarded the RSC to develop and manage Tembikai in Terengganu, albeit without a partner a deviation from the other four RSCs. While stock prices of small-cap, RSC-related players like Uzma and Scomi Energy Services had an incredible run in CY13, we believe premiums for such counters will wane once news flow on RSCs become more fluid. Uzma s recent price correction is a testimony that market expectations have been priced in. Therefore, we believe that the next catalyst, barring any negative development, will be the execution of the RSCs by the respective winners. Figure 1: Share price movements (April 2013-April 2014) UMW O&G Daya KNM TH Heavy Gas Malaysia Muhibbah Scomi Energy Uzma Yinson Wah Seong SapuraKencana Pet Gas Pet Chem Petra Energy Perisai Perdana Petroleum MMHE Favelle Favco Dialog Dayang Coastal Bumi Armada Alam Maritim - 0% 100% 1 200% 2 Source: Bloomberg We believe Bumi Armada and Wah Seong will be financially capable of undertaking such projects Other potential RSC winners to look forward to? There were at least 10 s up for bidding last year but, excluding the first three RSCs, ie Berantai, Balai and the Kapal-Banang-Meranti cluster, only two have been announced thus far. We do not discount the possibility that the first-generation RSC winners, SapuraKencana Petroleum (SAKP MK, BUY, FV: MYR5.61), Dialog (DLG MK, BUY, FV: MYR3.71) and Petra Energy (PENB MK, NEUTRAL, FV: MYR2.43), will still be interested in securing more such contracts. These companies successes in hitting first oil within their respective s are testament to their capabilities. As such, we will not be surprised if they decide to commit to a second RSC on a standalone basis. RSC projects of such scale require huge capex. Other O&G players that we believe will be financially capable of undertaking such projects are Bumi Armada (BAB MK, BUY, FV: MYR4.45) and Wah Seong Corp (WSC MK, BUY, FV: MYR2.25). See important disclosures at the end of this report 2

3 Figure 2: List of existing marginal s Block Name Type Owner & partner Interest Date awarded Date started production & expiry production project PM313 Sepat marginal oil Marginal oil PM309 Berantai marginal gas Marginal PM318 Bubu marginal oil Marginal oil SK306 SK309 Balai cluster - Balai oil - Bentara oil - West Acis - Spaoh oil & Serendah marginal oil & Marginal oil & Marginal oil & SK305 Bayan marginal oil Marginal oil Near SK306 PM306 PM314 D12 small marginal gas Kapal-Banang-Meranti marginal oil cluster Marginal Marginal oil Petrofac Energy Development SB SapuraKencana Petroleum Petrofac Energy Development SB SapuraKencana Petroleum Vestigo Petroleum SapuraKencana Petroleum ROC Oil Malaysia (Holding) SB Dialog Group Petronas Carigali (reassigned to BC Petroleum, a JV between three parties) Jan 2011 n.a. Jan 2011 Hit first oil in Nov 2013 n.a. Aug 2013 n.a. 48% 32% 20% Aug 2011 Dialog Group Halliburton Bayan Petroleum Tanjung Baram n.a. Uzma EQ Petroleum Developments Malaysia SB Tembikai-Chenang marginal s Marginal s PM305 Ophir marginal oil Marginal oil SK320 Bunga Pelaga marginal Marginal SK320 SB305 SB312 Lada Hitam marginal Mutiara Hitam marginal Rusa Timur marginal oil Marginal Marginal Marginal oil Source: Petronas, Bursa Malaysia, Maps & Globe Specialist Distributor SB Nov 2012 Sarawak Shell 100% End 2011 and to be redeveloped over 20 years Coastal Energy 70% Awarded to Petra Energy 30% Coastal in Jan Petra signed the partnership agreement with Coastal in Sept n.a. The RSC was signed in Mar 2014 Vestigo Petroleum 100% Awarded in Oct 2013 Oil production has commenced in Nov 2013 n.a. First gas expected in 4QCY14 First oil from Kapal by June 2013, and production from Banang in 2014 & Meranti by Production oil will be expiring by June First oil by Mar 2015 n.a. Total investment amounts to USD27bn (c.myr86.4bn) Land clearing works are already underway on the 6,242-acre site and construction will only begin once the handover of the land to Petronas by the Johor State Government is made official The PIC is slated for completion by 2019 RAPID project to take off soon Petronas approval of the PIC project last week did not surprise the market as the project has generally been expected to pull through. The main question largely revolves around the size of the development whether it will be scaled down from the initially estimated MYR60bn. According to the statement released by Petronas, the PIC consists of: i) the refinery and petrochemical integrated development (RAPID) project estimated to cost USD16bn (c.myr51.2bn), and ii) other associated facilities that will cost about USD11bn (c.myr35.2bn). The estimated total investment of MYR86.4bn has now surpassed the MYR60bn mark. To date, we note that the project has signed up several names like Italy's Versalis SpA, Japan's ITOCHU (8001 JP, NR), Thailand s PTT Global Chemical (PTTGC TB, BUY, FV: THB83.40) and Germany's Evonik Industries (EVK GR, NR). The partners respective final investment decisions (FIDs) will be announced in due course upon approval of their respective boards. Land clearing works are already underway on the 6,242 acre site and construction will only begin once the handover of the land to Petronas by the Johor State Government is official. The PIC will house a 300,000 barrels/day (bpd) refinery and petrochemical complex with a combined 7.7m tonnes per annum (mtpa) capacity of various product grades. Associated facilities such as raw water supply, a power cogeneration plant, a liquefied natural gas (LNG) terminal and other ancillaries will be built to complement RAPID. The PIC is slated for completion by 2019, a delay from the initial target of late See important disclosures at the end of this report 3

4 One of the major beneficiaries could be Muhibbah Engineering Other beneficiaries include Dialog, Petronas Chemicals Group, KNM Group, Barakah Offshore Petroleum and MMHE Major beneficiaries We believe that Muhibbah Engineering (MUHI MK, BUY, FV: MYR3.35) will be one of the major beneficiaries of such development. It has an excellent domestic and international track record in the construction of LNG facilities. It was awarded with: i) the contract to pre-assemble the heavy lifting facility and breakwater caissons and preparation of shipping barges for the Gorgon LNG jetty and marine structure in Australia, ii) the construction of the Yemen LNG jetty, and iii) Petronas LNG Train 9 Project in Bintulu, Sarawak. Dialog is also a good proxy for exposure to such development as its storage facilities will be of use to store the PIC refinery s products and/or raw materials once the project is completed. Other potential beneficiaries include Petronas Chemicals Group (PCHEM MK, NEUTRAL, FV: MYR6.48), KNM, Barakah Offshore Petroleum and Malaysia Marine & Heavy Engineering (MMHE MK, NEUTRAL, FV: MYR3.80). There are five EOR projects in the pipeline Two projects will be developed using the WAG method while the rest will apply chemical injectants Reaffirmation of development commitment in Malaysia The recently-concluded OTC Asia 2014 set out themes that we believe will shape the local O&G industry in the next five years at least. The foreign oil majors have rekindled our confidence with their commitment to further develop s signed under their respective production sharing contracts (PSCs), mainly centred around EOR efforts. Petronas has five EOR projects in the pipeline Angsi, North Sabah, Dulang, Bokor and Baram Delta Group with the former two potentially developed via chemical injection and the rest through the water-alternating-gas (WAG) method. According to industry news source Upstream, Petronas has invited bids for the engineering, procurement, construction, installation and commissioning (EPCIC) of a central processing platform (CPP) to be linked to the existing Baronia gas compression unit. The award covers the integrated Bardegg 2 and Baronia EOR in East Malaysia. This is one of the s under the Baram Delta Operations EOR PSC signed between Petronas, Petronas Carigali and Shell. MMHE is teaming up with Technip SA while TH Heavy Engineering is partnering USbased McDermott to bid for the Bardegg 2 CPP. Other contenders for the project include SapuraKencana, Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries, Offshore Oil Engineering Company and Petrofac. The bidding results are reported to be unveiled by mid-2014 and the CPP is slated to be delivered by early We believe the project could be worth around MYR2bn-2.5bn. Other than the offshore structure fabricators such as SapuraKencana, MMHE and TH Heavy, chemical injectant suppliers such as Dialog may benefit from such efforts by Petronas. M&As to dominate headlines We expect M&As to hog the sector s headlines in CY14. With the local market getting increasingly saturated and reinvestment opportunities decreasing, acquisitions will be the next phase to grow earnings. We see M&A opportunities among companies that already have an existing stake in others, namely Wah Seong, which has a 27% stake in Petra Energy, and Dayang Enterprise (DEHB MK, BUY, FV: MYR4.60), which has a 25% stake in Perdana Petroleum (PETR MK, NEUTRAL, FV: MYR2.10). The sale of Murphy Oil (MUR US, NR) s Malaysian upstream assets will be of interest as local players such as SapuraKencana, Hibiscus Petroleum (HIBI MK, NR), Sona Petroleum (SONA MK, NR) and CLIQ Energy (CLIQ MK, NR) are reportedly interested in those assets, which are believed to be worth approximately USD2bn- 3bn. As the hefty price tag may be a deterrent to any single company, we believe there is a possibility of a consortium being formed just to acquire the assets. See important disclosures at the end of this report 4

5 The financial ratio criteria for shariah compliance are: i) non-shariah cash-to-asset ratio of <33%, and ii) non-shariah debt-toasset ratio of <33% Our simulation assumes: i) all cash to be conventional instruments, ii) all foreign currency borrowings to be conventional instruments More O&G companies find it to be relatively costlier to maintain shariah status vs the option of obtaining cheaper foreign currency borrowings, which may be non-shariah The heavy capex project nature and the transformation of companies into asset owners tend to require bigger debt funding We suggest several names that may potentially fall out of or return to the shariahcompliant list Expecting short-term weakness in share prices Anticipating changes in shariah status. The next updated shariah-compliant stock list by the Securities Commission (SC) is expected to be unveiled in May This review will be premised on 4QCY13 financials. The key criteria for listed entities to remain shariah-compliant are: i) conventional cash instruments must not exceed 33% of assets, and ii) conventional debt instruments must not exceed 33% of assets. Assumptions. We carried out a quick simulation based on the latest quarterly numbers. We assume: i) all cash to be conventional instruments, and ii) conventional debts to be non-myr denominated loans published in company statements. For the second point, we assume that only foreign currency borrowings are non-shariahcompliant. The actual amount of conventional debts is assumed conservatively to be larger than our findings to account for some MYR loans which may be non-shariahcompliant. Our observations on the O&G stocks in our universe on shariah compliance reveal several key points. Costly. Firstly, more O&G companies have shown increasing interest in taking on non-shariah-compliant debt instruments like most non-myr denominated offshore loans. These loans typically carry lower interest rates relative to local loans. More O&G companies revealed that they prefer lower financing costs (subsequently better profitability and ROI) vs the shariah status. It could still be costly to refinance conventional loans into shariah-compliant debts if the pricing is not favourable enough, as the latter involves additional administrative costs and stamp duties. Project nature requires more debt funding. Secondly, companies that have transformed into integrated players and asset owners may require higher debt funding. We noted that Bumi Armada and Yinson (YNS MK, BUY, FV: MYR10.90) two Malaysian names among the Top 6 global floating production, storage and offloading (FPSO) players have absorbed significant financing obligations required for FPSO projects. The same goes for SapuraKencana, which had to finance and refinance ballooning debts to fund major acquisitions of Seadrill and New assets. Based on our assumptions, our current simulation suggests that some O&G names are at risk of hitting the limits of the financial ratio criteria. We expect to see some names falling out of the shariah-compliant list and some returning. These names include: SapuraKencana Petroleum. Its foreign currency borrowings quadrupled in CY13, accounting for 33% of its assets. We believe it may turn non-shariahcompliant due to borrowings used to fund its major acquisitions. Its major shareholders are STSB (16%), EPF (12%), Khasera SB (10%) and Seadrill (8%). Perdana Petroleum. Currently shariah-compliant, Perdana Petroleum s USD borrowings soared 240% in FY13, accounting for 44% of its assets. Its major shareholders are Dayang (25%), Lembaga Tabung Haji (9%) and EPF (8%). Management has indicated that it favours cheaper costs of funding from USD borrowings. Wah Seong. Currently shariah-compliant, Wah Seong s USD borrowings grew 33% in FY13, accounting for 30% of its assets. We believe the company is at risk of breaching the criteria as we are not able to ascertain the amount of local MYR borrowings that are conventional. Its major shareholders are Wah Seong Trading Ltd (33%), EPF (6%), Lembaga Tabung Haji (5%) and KWSP (5%). Bumi Armada. Currently non-shariah-compliant, Bumi Armada s foreign currency borrowings surged 83% in FY13, accounting for 32% of its assets (the actual ratio is very likely to be higher). However, the company has expressed intentions of refinancing its existing borrowings via sukuk issuances. Given that it is close to the borderline, we think Bumi Armada may potentially return to become shariah-compliant. Its major shareholders are Objektif Bersatu SB (42%), EPF (8%) and Amanah Saham Bumiputera (6%). Yinson Holdings. Currently non-shariah compliant, Yinson s foreign currency borrowings quadrupled in CY13, accounting for of its assets. The company has clearly expressed its intentions to remain non-shariah-compliant as it favours cheaper financing costs. Its major shareholders are the Lim family (>35%), Kencana Capital SB (18%) and EPF (6%). See important disclosures at the end of this report 5

6 Figure 3: Conventional debt-to-asset ratio (%) Conventional debt-to-asset ratio 4QCY13 3QCY13 2QCY13 1QCY13 4QCY12 3QCY12 2QCY12 1QCY12 Alam Maritim na na na na na na na na Bumi Armada 31.9% 28.9% 27.9% 24.3% 22.1% 22.1% 23.3% 24.5% Coastal Contracts 0.5% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.3% Daya Materials na na na na na na na na Dayang Enterprise na na na na na na na na Dialog 7.2% 7.8% 6.8% 7.5% 8.7% 6.9% 7.5% 6.3% Favelle Favco 0.5% 0.4% 0.2% 0.2% 0.5% 1.4% 0.4% 0.2% Malaysia Marine and Heavy Engineering na na na na na na na na Muhibbah Engineering 0.2% 0.2% 0.1% 0.1% 0.2% 0.4% 0.4% 0.2% Perdana Petroleum 44.1% 28.7% 24.7% 19.8% 20.3% 21.1% 19.5% 20.0% Perisai Petroleum Teknologi 23.8% 18.7% 25.7% 26.7% 29.3% 39.3% 41.6% 43.5% Petra Energy 2.5% 2.7% 2.6% 3.4% 6.1% 6.3% 7.3% 7.5% Petronas Chemicals na na na na na na na na Petronas Gas 6.4% 6.7% na na 5.9% 6.8% na na SapuraKencana Petroleum 32.9% 32.0% 31.3% 14.5% 13.0% 11.0% na na Wah Seong 30.4% 29.6% 28.6% 27.4% 26.3% 28.1% 28.8% 29.6% Yinson Holdings 50.2% 30.4% 26.0% 29.1% 30.9% 36.5% 25.1% 21.7% Source: RHB estimate, companies data Figure 4: Foreign currency borrowings relative to total borrowings Non-MYR denominated borrowings 4QCY13 3QCY13 2QCY13 1QCY13 4QCY12 3QCY12 2QCY12 1QCY12 Alam Maritim na na na na na na na na Bumi Armada 74.3% 69.2% 67.6% 60.7% 57.5% 55.7% 58.4% 57.1% Coastal Contracts 53.1% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 15.4% Daya Materials na na na na na na na na Dayang Enterprise na na na na na na na na Dialog 25.7% 27.4% 24.2% 29.4% 38.3% 38.5% 47.7% 44.4% Favelle Favco 8.0% 5.3% 2.6% 2.3% 6.0% 15.4% 4.5% 2.2% Malaysia Marine and Heavy Engineering na na na na na na na na Muhibbah Engineering 1.9% 2.7% 0.8% 0.6% 1.1% 2.7% 2.4% 1.4% Perdana Petroleum 90.8% 76.7% 71.0% 61.6% 61.3% 71.0% 55.0% 54.6% Perisai Petroleum Teknologi 97.2% 96.9% 96.5% 96.2% 96.7% 96.8% 96.9% 98.7% Petra Energy 11.1% 15.7% 13.4% 14.7% 25.2% 23.3% 26.7% 27.4% Petronas Chemicals na na na na na na na na Petronas Gas 100.0% 100.0% na na 38.0% 61.6% na na SapuraKencana Petroleum 70.3% 68.3% 65.4% 37.0% 33.9% 29.6% na na Wah Seong 91.5% 88.6% 87.7% 84.9% 83.6% 86.5% 89.8% 90.4% Yinson Holdings 83.6% 62.0% 52.9% 52.8% 55.1% 69.7% 51.3% 44.4% Source: RHB estimate, companies data See important disclosures at the end of this report 6

7 Figure 5: Conventional cash-to-asset ratio (%) Conventional cash-to-asset ratio 4QCY13 3QCY13 2QCY13 1QCY13 4QCY12 3QCY12 2QCY12 1QCY12 Alam Maritim na na na na na na na na Bumi Armada 7.2% 4.8% 8.4% 5.8% 7.2% 10.4% 13.2% 16.0% Coastal Contracts 20.6% 19.5% 19.7% 12.6% 17.9% 19.2% 16.8% 17.6% Daya Materials na na na na na na na na Dayang Enterprise na na na na na na na na Dialog 15.4% 14.9% 22.1% 16.9% 21.1% 20.8% 28.2% 33.7% Favelle Favco 15.4% 9.5% 9.9% 10.9% 11.4% 10.6% 15.6% 18.9% Malaysia Marine and Heavy Engineering na na na na na na na na Muhibbah Engineering 16.1% 12.0% 13.5% 12.7% 11.9% 9.9% 11.8% 11.1% Perdana Petroleum 5.2% 5.9% 8.3% 11.0% 4.9% 3.6% 3.3% 4.3% Perisai Petroleum Teknologi 4.4% 1.9% 4.1% 3.3% 2.2% 3.1% 1.5% 7.0% Petra Energy 12.6% 13.3% 16.6% 7.2% 12.7% 8.7% 7.4% 11.2% Petronas Chemicals na na na na na na na na Petronas Gas 6.9% 5.6% na na 16.4% 19.3% na na SapuraKencana Petroleum 5.2% 4.7% 5.8% 6.7% 7.3% 10.2% na na Wah Seong 15.2% 14.8% 15.3% 15.0% 14.4% 17.3% 20.8% 25.2% Yinson Holdings 12.9% 6.5% 7.8% 4.5% 3.0% 0.7% 2.7% 0.4% Source: RHB estimate, companies data Our big-cap Top Pick is SapuraKencana Petroleum Our Top Picks We see the possibility of SapuraKencana being excluded from the list of shariahcompliant stocks in the next revision in May. Its last closing price of MYR4.45 indicates a 26% upside from our MYR5.61 FV. Any share price weakness following the announcement of the new shariah-compliant stock list will be an attractive entry point. We derive our SOP-based FV of MYR5.61 by applying FY15F P/Es of: i) 18x on its offshore construction and subsea services (OCSS) segment, ii) 35x on its drilling and energy unit, and iii) 20x on its fabrication and hook-up, commissioning and construction (HuCC) division. We also estimate that the consolidation of New s upstream assets may potentially boost SapuraKencana s FV by MYR0.41/share. Our mid-cap Top Picks are Dayang and Coastal Contracts We value Dayang at a 16x FY14F P/E, in line with the valuations of small- to mid-cap O&G firms. Dayang is our mid-cap top BUY for its established track record of project delivery, consistent above-industry profit margins, and earnings visibility from its landmark MYR4.2bn Pan Malaysia HuCC jobs, which will keep it busy until We believe Dayang s true earnings potential is set to be unveiled as the full recognition of the HuCC jobs is expected in 2HFY14/15. That said, the company is still looking to grow. It has traditionally been operating under a low gross gearing of x, leaving ample room for gearing to increase as it expands its capability across the O&G value chain. With a MYR1.24bn contract for a gas compressor jack-up unit in the bag and 20 years of earnings visibility, Coastal Contracts (COCO MK, BUY, FV: MYR5.44) is effectively an upstream asset owner. We understand that there may be more of such contracts going forward, but not in the near term. Therefore, we believe the success of the first unit bodes well for other similar future contracts, with either Pemex or other oil companies requiring such technology. Coastal Contracts is also set to receive the delivery of its first jack-up drilling rig in 2HFY14. We gather that its management is actively negotiating for a charter contract. In the event that it fails to secure any, it will possibly sell the rig to any interested party. Our SOP-derived FV of MYR5.57 is premised on: i) a target FY14 P/E of 13x for the shipbuilding division in line with other small- to mid-cap O&G stocks that we cover, and ii) the jack-up gas compressor unit contract to contribute MYR0.45/share based on DCF. See important disclosures at the end of this report 7

8 Our small-cap Top Pick is Wah Seong We value Wah Seong at a 16x P/E, premised on its earnings turnaround story. The company is a leading global pipe coater that is well-positioned to capture opportunities in global offshore pipeline and pipeline replacement works. Wah Seong, which has coating plants that services operators in the Gulf of Mexico and Norway, has a MYR5bn tenderbook throughout FY16, and has already commenced big-ticket pipe-coating orders for the Polarled and North Malay Basin projects. The strong recovery in its O&G division s 4Q13 EBIT margin, partly due to higher orderbook replenishment, reiterates our view of its margins potentially recovering to the midteens. The catalysts are: i) the expansion of its high-margin deepwater coating capability (riding on the USD225bn global deepwater capex for ), ii) soonerthan-expected breakeven point in its loss-making plantation segment, and iii) the award of more Petronas projects. See important disclosures at the end of this report 8

9 RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage Disclosure & Disclaimer All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared for information purposes only. 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If you are not an "Institutional Investor", "Expert Investor" or "Accredited Investor", this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with this research report, you are to contact our Singapore Office, DMG & Partners Securities Pte Ltd Hong Kong This report is published and distributed in Hong Kong by RHB OSK Securities Hong Kong Limited ( RHBSHK ) (formerly known as OSK Securities Hong Kong Limited), a subsidiary of OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as RHBIB ), which in turn is a wholly-owned subsidiary of RHB Capital Berhad. 9

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