Small hiccup, turnaround remains in motion Petra Energy (PENB) remains a strong contender to win the upcoming modification, construction and maintenance (MCM) contract from Petronas, which is to be split into 6 packages. We are cutting our 2017E net profit in light of the correction in global oil prices of late, which may lead to slower work execution in the near term. We are also trimming our 2018-19E earnings after tweaking some balance sheet items. As a result, we lower our TP to RM1.55 (from RM1.66), but reaffirm our BUY call. Expect recovery in activities both qoq and yoy 2Q17 revenue is expected to improve qoq and yoy underpinned by higher level of work activity under the existing Petronas Pan Malaysia contract in hand. Coupled with that, the group will also likely to be busy executing an EPCC contract for an enchanced oil recovery (EOR) project which will stretch over the coming quarters. Based on our scenario analysis, we believe PENB s revenue in 2Q17 could see a 15-20% yoy increase. Overall, we expect 2Q17 net profit of about RM5m, supported by higher work activity, but potentially offset by lower RSC contribution as a result of a lower 2Q17 Brent oil price which has fallen 7% qoq from an average of USD54.6/bbl in 1Q17 to USD51/bbl in 2Q17. Looking forward to MCM contract; RSC would be icing on cake We believe the current outstanding order book of RM1.4bn, which will be expiring in May 2018, may not be fully translated into actual revenue due to its call-out nature. However, we are not overly concerned with this as we remain confident that PENB s order book will be replenished by the upcoming MCM contract. Besides that, PENB is a small-cap proxy to ride on higher oil prices through its Kapal, Banang, Meranti (KBM) Risk Service Contracts (RSC), which will last until June 2020. We estimate PENB s 30% share of profit will yield them RM35m for 2017E. Based on our sensitivity analysis, we estimate every USD1/bbl fall from our base case crude oil price assumption would result in another 4-7% decline in our 2017-19E EPS. However, the potential EPS upside from a weaker MYR than our current USD/MYR assumption of 4.10, which is on the conservative end, could offset the impact. Reaffirm BUY rating with a lower target price of RM1.55 We reaffirm our BUY call with a lower SOTP-derived 12-month TP of RM1.55 (from RM1.66). We continue to like PENB for (1) its turnaround story, (2) healthy balance sheet which provides ample room for leverage, (3) being a direct proxy to oil prices, and (4) strong contender for the upcoming MCM contract. Risk: Petronas scaling back its orders. Earnings & Valuation Summary FYE 31 Dec 2015A 2016A 2017E 2018E 2019E Revenue (RMm) 654.8 332.1 384.0 468.4 524.2 EBITDA (RMm) 54.6 (38.6) 36.7 42.9 48.2 Pretax profit (RMm) 62.0 (124.5) 25.9 51.3 62.5 Net profit (RMm) 47.2 (114.2) 23.6 50.7 63.2 EPS (sen) 14.7 (35.6) 7.4 15.8 19.7 PER (x) 7.8 n.m 15.6 7.3 5.8 Core net profit (RMm) 38.1 (31.7) 23.6 50.7 63.2 Core EPS (sen) 11.9 (9.9) 7.4 15.8 19.7 Core EPS growth (%) 11.0 (183.4) 174.4 114.7 24.8 Core PER (x) 9.7 n.m 15.6 7.3 5.8 Net DPS (sen) 10.0 5.0 5.0 5.0 5.0 Dividend Yield (%) 8.7 4.3 4.3 4.3 4.3 EV/EBITDA (x) 4.7 42.0 5.1 3.1 2.1 Company Update Petra Energy PENB MK Sector: Oil & Gas RM1.15 @ 11 July 2017 BUY (maintain) Upside: +35% Price Target: RM1.55 Previous Target: RM1.66 (RM) 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Price Performance 1M 3M 12M Absolute -1.7% -6.5% -6.5% Rel to KLCI 0.2% -7.5% -11.9% Stock Data Issued shares (m) 320.9 Mkt cap (RMm)/(US$m) 369.1/85.9 Avg daily vol - 6mth (m) 0.2 52-wk range (RM) 0.91-1.27 Est free float 18.6% BV per share (RM) 1.32 P/BV (x) 0.87 Net cash/(debt) (RMm) 3.05 ROE (2017E) 5.6% Derivatives Nil Shariah Compliant Yes Key Shareholders Shorefield Resources 27.5% Wah Seong 27.0% Lembaga Tabung Haji 9.9% Source: Affin Hwang, Bloomberg Tan Jianyuan (603) 2146 7538 Jianyuan.tan@affinhwang.com Chg in EPS (%) - (20.9) (5.3) (4.3) Affin/Consensus (%) - 0.7 1.0 1.1 Source: Company, Bloomberg, Affin Hwang forecasts Page 1 of 5
Cutting 2017-19E EPS in light of the dip in oil price We are cutting our 2017E EPS by 21% (ie, in net profit terms from RM29.8m to RM23.6m), mainly to reflect the possibility of a deferment in executing the earlier Pan Malaysia work programme. Also, as the revenue economy of scale is not expected to be achievable at the current juncture, we revise our gross profit margin lower by 50bps to 7.5%. We make no changes to our RSC model assumptions which are based on a USD55/bbl oil price assumption for 2017E. We have also trimmed our 2018-19E earnings by 4-5% as we fine-tune some balance sheet items. Our crude oil assumption remains largely unchanged at USD60/bbl over 2018-19E. Our USD/MYR assumption imputed across 2017-19E stands at 4.10 which may see room for potential upside if the Ringgit continues to depreciate against the USD. With this earnings revision What it means is that we now expect PENB s bread and butter business to make slight losses (estimated at RM1.9m) at the operating level vis-à-vis our earlier assumption of a breakeven. This misfortune, if proven true may be a slight deviation from our earlier view that its topline business will break even at the operating level. Nevertheless, we remain convinced that after taken into account the KBM associate profit, PENB will return to the black in 2017E, vs. core net losses of RM31.7m in 2016. Key risks to our call The key downside risks would be: Petronas scaling back its work orders resulting in slower-than-expected revenue recognition and a continuous decline in crude-oil prices leading to lower RSC remuneration fees being recognised. Fig 1: PENB s SOTP valuation Sum of parts valuation Value (RMm) Value per share (RM) Remarks OES businesses (services and marine assets segment) 329.9 1.03 9x 2017E EV/EBITDA 30% stake in Kapal, Banang, Meranti cluster RSC 166.7 0.52 DCF of FCF (10.2% WACC, RM4.10/USD) Enterprise Value 496.7 1.55 Net Debt (0.2) (0.00) End-2017E Equity Value 496.4 1.55 Source: Affin Hwang estimates and forecasts Page 2 of 5
Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 12 July 2017 Focus charts Fig 2: Revenue and net profit trend RM'm Revenue Net profit 700.0 600.0 500.0 400.0 300.0 200.0 100.0 - (100.0) (200.0) 2014 2015 2016 2017E 2018E 2019E Fig 4: Associate profit derived from KBM RSC RM'm 40.0 35.0 Fig 3: Gross profit and net-profit margin trend Gross Profit Margin Net Profit Margin 20.0% 15.1% 9.0% 10.0% 9.7% 10.0% 7.5% 10.8% 12.1% 5.6% 7.2% 6.1% 0.0% -14.6% -10.0% -20.0% -30.0% -34.4% -40.0% 2014 2015 2016 2017E 2018E 2019E Fig 5: Past-5-year forward P/BV (x) 1.7 1.5 30.0 1.3 +1SD: 1.2x 25.0 20.0 15.0 Maiden RSC contribution 1.1 0.9 Avg: 0.9x 10.0 0.7-1SD: 0.6x 5.0 0.5-3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 FY17E Source: Bloomberg, Affin Hwang forecasts Page 3 of 5
PENB - FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E Revenue 655 332 384 468 524 Growth Operating expenses -600-371 -347-426 -476 Revenue (%) 4.9-49.3 15.6 22.0 11.9 EBITDA 55-39 37 43 48 EBITDA (%) -20.7-170.6-195.1 17.1 12.2 Depreciation -42-38 -39-39 -40 Core net profit (%) 10.7-183.4-174.4 114.7 24.8 EBIT 13-77 -2 4 9 Net int income/(expense) -11-13 -8-6 -5 Profitability Exceptional gains / (losses 9-82 0 0 0 EBITDA margin (%) 8.3-11.6 9.5 9.2 9.2 Associates' contribution 51 47 35 54 59 PBT margin (%) 9.5-37.5 6.7 10.9 11.9 Pretax profit 62-124 26 51 62 Net profit margin (%) 7.2-34.4 6.1 10.8 12.1 Tax -15 10-2 -1 1 Effective tax rate (%) 138.6 6.0-24.0-24.0-24.0 Minority interest 0 0 0 0 0 ROA (%) 4.2-11.8 3.0 6.6 7.5 Net profit 47-114 24 51 63 Core ROE (%) 8.9-23.7 5.6 11.4 13.1 Core net profit 38-32 24 51 63 ROCE (%) 1.4-9.9-0.3 0.6 1.3 Dividend payout ratio (%) 68.0-14.1 68.0 31.7 25.4 Balance Sheet Statement FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E Liquidity Fixed assets 437 340 312 283 253 Current ratio (x) 1.4 1.1 1.2 1.3 1.6 Other long term assets 58 111 111 111 111 Op. cash flow (RMm) 29-7 -9 35 41 Total non-current assets 495 451 423 394 364 Free cashflow (RMm) 5-11 -19 25 31 Cash and equivalents 214 239 159 224 301 FCF/share (sen) 1.7-3.5-5.8 7.8 9.5 Stocks 31 8 10 12 13 Debtors 360 109 126 154 172 Asset management Other current assets 6 23 23 23 23 Debtors turnover (days) 200.9 120.1 120.0 120.0 120.0 Total current assets 611 379 318 413 510 Stock turnover (days) 18.7 7.9 10.2 10.0 9.9 Creditors 205 169 156 187 207 Creditors turnover (days) 124.8 166.1 163.6 160.3 158.6 Short term borrowings 221 174 120 120 120 Other current liabilities 1 0 0 0 0 Capital structure Total current liabilities 427 343 276 307 327 Net gearing (%) 24% 1% 0% -14% -28% Long term borrowings 121 69 39 39 39 Interest cover (x) 4.9-3.0 4.8 6.8 9.0 Other long term liabilities 11 0 0 0 0 Total long term liab. 132 69 39 39 39 Shareholders' Funds 547 418 425 460 507 Quarterly Profit & Loss Minority Interest - - - - - FYE 31 Dec (RMm) 1Q16 2Q16 3Q16 4Q16 1Q17 Revenue 113 83 76 61 70 Cash Flow Statement Operating expenses -111-80 -86-46 -69 FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E EBITDA 2 2-9 15 1 Pretax Profit 62-124 26 51 62 Depreciation -11-8 -10-7 -8 Depreciation & amortisatio 42 38 39 39 40 EBIT -9-6 -20 8-8 Working capital changes 0 60-32 1 0 Int expense -4-4 -4 0-3 Cash tax paid -9-6 -2-1 1 Associates' contribution 10 12 17 8 15 Others -66 25-39 -56-63 Exceptional items -4-11 -13-52 1 C/F from operation 29-7 -9 35 41 Pretax profit -7-9 -20-36 5 Capex -23-4 -10-10 -10 Tax 0 0-1 8 0 Others 129 153 39 56 63 Minority interest 0 0 0 0 0 C/F from investing 105 149 29 46 53 Net profit -7-9 -21-28 5 Debt raised/(repaid) -43-107 -84 0 0 Core net profit -3 2-8 24 5 Dividends paid -26-13 -16-16 -16 Others -32-33 0 0 0 Margins (%) C/F from financing -101-153 -100-16 -16 EBITDA 1.8 2.7 (12.4) 25.3 0.8 Net change in cash flow 33-11 -80 65 77 PBT (6.2) (10.7) (25.8) (59.1) 7.6 Net profit (6.3) (10.8) (27.4) (45.9) 7.6 Free Cash Flow 5-11 -19 25 31 Page 4 of 5
Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia. T : + 603 2146 3700 F : + 603 2146 7630 research@affinhwang.com Page 5 of 5