Reflections on Volume

Big volume without further upside equals distribution
Big volume without further downside equals accumulation

Volume tends to peak at turning points
Volume often precedes price movement
Volume is a relative study

Thursday, November 18, 2010

Kencana Petroleum Bhd

Maintain outperform at RM1.98 with target price RM2.28: Over the weekend, The Edge quoted Kencana's CEO Datuk Mokhzani Mahathir as saying that he was not paring down his stake in the company. He also denied speculation that McDermott is looking to buy up to 5% of his holdings in Kencana. However, he confirmed that the company is considering raising funds for its expansion plans.

We are not surprised by the denial as Mokhzani has been consistently clear about his commitment to Kencana, which he bought into well before the company listed in 2006. He owns 38.6% of Kencana directly and indirectly through Khasera Baru Sdn Bhd. The other substantial shareholder is the Employees Provident Fund with an 8.2% stake.

As for the involvement with McDermott, we understand that the US-based company may surface as a JV partner of Kencana instead of a shareholder. We believe Kencana could be interested in working with McDermott to build a pipeline installation business after its attempt with US-based Global'' failed earlier this year.

Following the breakdown of the JV with Global in May, Kencana has maintained its interest in owning and operating pipelay barges, either by going it alone or by roping in a partner. McDermott has extensive experience in Malaysia and has been working closely with Bumi Armada in the pipeline installation business.

As a 2,000-tonne shallow-water pipelay barge would cost no less than US$100 million (RM314 million), Kencana may issue new shares to beef up its war chest and reduce borrowings. As at end-July, the company had borrowings of RM228 million, which amounted to 30% of shareholders' funds. At last Friday's closing price, a 10% private placement would raise gross proceeds of RM328 million. Kencana has received shareholders' approval for a private placement but the time line of the exercise has not been disclosed.

On Nov 11, Kencana's share price scaled to a new all-time high of RM2.11 before closing at RM2.03 with 31 million shares traded. Apart from the possibility of a new JV partner, order book expansion may have been a catalyst of the share price jump and active trade. In our visit note dated Nov 2, we wrote that Kencana is eyeing deals worth RM5.2 billion in Malaysia and at least US$300 million in India. We understand that the contract that may be awarded sooner than the others is the RM600 million fabrication contract given out by Petroliam Nasional Bhd (Petronas) and its production-sharing contractors. Year-to-date, the company has secured 12 jobs worth RM819 million, bringing its order book value to RM1.9 billion.

The potential entrance of a new high-profile partner adds to Kencana's attractions. The company is already benefiting from a steady flow of projects in Malaysia, Vietnam, India and Australia, and is expected to expand its order book. We maintain our EPS forecast and target price of RM2.28, pegged to an unchanged target market PER of 13.8 times. We continue to rate Kencana an outperform, with the potential share price triggers being: (i) active order book replenishment; (ii) a new JV partner; and (iii) M&A. ' CIMB Research, Nov 15

This article appeared in The Edge Financial Daily, November 16, 2010.

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