UOB Kay Hian Research Overweight on Malaysian O&G fabrication yards

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KUALA LUMPUR: UOB Kay Hian Research has initiated with an Overweight on Malaysia’s oil & gas (O&G) fabrication yards as the industry is undergoing a strong cyclical recovery.

It said on Tuesday, June 7 that Petroliam Nasional Bhd (Petronas) had pledged to spend RM50 billion to RM55 billion per year for the next five years, a big increase of 35%-48% from 2010 capex of RM37 billion.

“The rate of increase in Petronas spending is a good gauge of the industry’s prospective growth which could be in the region of 20%-30% this year,” it said.

UOB Kay Hian estimated Petronas’ capex spending in 2011 would exceed the government’s 2011 budgeted development expenditure of RM49 billion.

The three major O&G upstream players’ (Marine and Heavy Engineering (MMHE), SapuraCrest Petroleum Bhd and Kencana Petroleum  Bhd) combined top-line of RM10 billion (which includes overseas contribution) is dwarfed by Petronas’ spending plans.

The research house initiated coverage on MMHE with a BUY. It said MMHE wass the closest proxy to Petronas spending as Petronas still had a 40% indirect stake in MMHE after its IPO.

“We project MMHE to deliver net profit CAGR of 24% over the next few years and will be a leading consolidation play. Our target price of RM8.80 is based on 21 times FY12F PE. MMHE’s monopoly over deepwater fabrication in Malaysia is its strong point.

As for Kencana, it has initiated coverage on Kencana Petroleum with a HOLD.

“Our target price is RM2.44, based on 18 times FY12F PE, a discount to MMHE’s, due to its smaller size. We believe most of its recent contract wins have been factored in its current share price. Entry price is RM2.20,” it said.

UOB Kay Hian said under the Economic Transformation Programme (ETP), the government has proposed the O&G sector to consolidate so that Petronas can create a healthy and growing secondary O&G services industry.

It said Malaysia’s fabrication yards give out a good portion of work to subcontractors, surrendering margins. Industry consolidation will reduce fabrication yards’ reliance on subcontractors and eliminate execution risks associated with outsourcing.

“MMHE’s proposed acquisition of Sime Darby’s Ramunia yard would effectively double its Pasir Gudang yard’s capacity to 130,000 million tonnes and also raise its share of domestic capacity to 50%.

“Equity partners such as Kencana are moving into a utility-based model where cash flows are more certain. Developing marginal fields with short lifespan also requires the mobilisation of floating production systems (FPS) and mobile operating and storage units (MOPU). Both MMHE and Kencana have the capability to fabricate and convert rigs into FPS and MOPU,” it said.

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