KUALA LUMPUR: Affin Hwang Capital Research retains its Buy for Petra Energy with a lower sum-of-parts derived 12-month target price of RM1.55 from RM1.66 as it trims its 2018-19E earnings after tweaking some balance sheet items.
It said on Wednesday it continues to like Petra Energy for its turnaround story, healthy balance sheet which provides ample room for leverage and being a direct proxy to oil prices.
Affin Hwang Research said Petra Energy remains a strong contender to win the upcoming modification, construction and maintenance contract from Petronas, which is to be split into six 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,” it said.
It pointed out Petra Energy's 2Q17 revenue is expected to improve on-quarter and on-year 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 Petra Energy's revenue in 2Q17 could see a 15%-20% on-year increase.
“Overall, we expect 2Q17 net profit of about RM5mil, supported by higher work activity, but potentially offset by lower risk sewrvice contract contribution," it said.
This is a result of a lower 2Q17 Brent oil price which has fallen 7% on-quarter from an average of US$54.6 per barrel in 1Q17 to US$51 in 2Q17.
“We believe the current outstanding order book of RM1.4bil, 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 Petra Energy'’s order book will be replenished by the upcoming modification, construction and maintenance contract contract.
“Besides that, Petra Energy is a small-cap proxy to ride on higher oil prices through its Kapal, Banang, Meranti (KBM) Risk Service Contracts, which will last until June 2020," it said.
Affin Hwang Research estimates Petra Energy’s 30% share of profit will yield them RM35mil for 2017E.
"Based on our sensitivity analysis, we estimate every US$1 a barrel fall from our bas case crude oil price assumption would result in another 4%-7% decline in our 2017-19E EPS.
“However, the potential EPS upside from a weaker ringgit than our current US$/ringgit assumption of 4.10, which is on the conservative end, could offset the impact,” it said.
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