oil & gas 20120104

Refer to important disclosures at the end of this report

HWANGDBS

KLCI : 1,513.54 Analyst QUAH He Wei +603 2711 2222 [email protected]

Source: DBS Vickers

TOP PICKS

Price Mkt Cap Target Price

RM US$m RM Rating

Bumi Armada 4.07 3,761 5.00 BUY Dialog Group 2.64 1,671 3.30 BUY Dayang 1.80 312 2.70 BUY

Bumi Armada : Malaysia-based international O&G offshore services provider with four synergistic units, namely FPSO, OSV, T&I and OFS

Dialog Group Bhd : Integrated specialist technical services provider to the oil, gas and petrochemical industries, with long-term recurring income from tank terminal operations.

Dayang Enterprise Holdings : Provides offshore platform maintenance services

Petronas: Record high 5-year capex of RM300bn

*Projected annual capex without domestic-international breakdown Source: Petronas, DBS Vickers

4 Jan 2012

Sector Focus Oil & Gas Companies

PETRONAS – The X Factor • Petronas’ record high capex will underpin sector

growth along the value chain

• Dishing out more contracts in 2012 with the commencement of mega projects, buoyed by strong oil prices

• Top picks: Bumi Armada, Dialog and Dayang for clear earnings visibility and strong growth

Exciting prospects in 2012. We expect Malaysia’s O&G upcycle to start in 2012 with Petronas going full throttle to sustain oil production. Petronas’ record RM300bn 5-year capex will be a strong re-rating catalyst for Malaysian O&G players. Critical gas shortage in the country has also prompted Petronas to fast-track upstream activities, which will benefit local players. Flurry of activity. In 2011, Petronas announced several plans including the development of marginal oil fields (RM5bn), enhanced oil recovery (RM46bn), and North Malay Basin project (RM15bn). The deepwater development at Gumusut-Kakap is on track for first production by 2013, while the investment decision for Malikai may be finalised in 2012. Downstream activities are picking up, led by the RM5bn Pengerang deepwater petroleum terminal, while Petronas’ RM60bn Refinery & Petrochemical Industrial Development (RAPID) project in southern Johor will conclude feasibility study by end-2012. Bumi Armada the top beneficiary. Bumi Armada is poised to secure large contracts from Petronas, especially FPSO jobs and marginal field projects, which could re-rate the stock. Expiration of the 6-month moratorium in Jan12 might provide a buying opportunity as Bumi Armada has a strong chance of winning contracts given its good track record and comprehensive solutions for oil field services. We initiate coverage of Dialog (Buy, RM3.30 TP) as the company is in the midst of a major transformation to propel its future earnings growth. We like Dialog for its resilient tank terminal earnings and integrated technical services that complement its growing operations. Dayang is our small-cap O&G pick for clear earnings visibility up to FY16 and niche expertise in topside maintenance and hook-up commissioning services.

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Malaysia Equity Research PP 12942/03/2012(029402)

Sector Focus

Malaysia Oil & Gas

HWANGDBS

Table of Contents Riding on larger Petronas capex in 2012 3

Marginal oil fields – a game-changing development 8 Booming downstream activity 10 Pengerang – Asia’s next oil storage hub 11 Stock Selection 12 Risks 13 Stock Profiles 14

Bumi Armada 15

Dayang 17

MMHE 19

Petronas Chemicals 21

Wah Seong 23

Sector Focus

Malaysia Oil & Gas

HWANGDBS

Riding on larger Petronas capex in 2012 Gone are the days of easy oil in shallow local waters as depleting oil resources is a global phenomenon. Petronas’ recovery factor is estimated at 26% for main oilfields, although this can improve with optimal production techniques and knowledge exchange. Since 2010, Petronas has made sustainable oil production a priority because of shrinking hydrocarbon reserves locally and abroad. Petronas has committed to a 5-year capex plan worth RM300bn. This was revised up from RM250bn following the launch of the US$20bn RAPID project in southern Johor to arrest declining hydrocarbon production in Malaysia. According to Petronas’ CEO, it would raise capex to cover rising costs, upgrade asset integrity, enhance yields of existing/legacy assets, drive growth, and venture into more challenging and green field projects such as enhanced oil recovery, deep-water and unconventional hydrocarbons. Petronas: Increasing capex in Malaysian O&G space

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Source: Petronas Malaysia’s O&G sector has been identified as a key transformation area to help propel the country into a high-income nation. Petronas has been increasing capex spending in Malaysia over the past two years, with domestic capex at 67-72% of its total capex (vs 55% previously). Petronas’ blueprint comprises a three-prong development plan: 1. Enhance oil recovery at existing mature oilfields by better

managing its technological reservoir;

2. Develop marginal oilfields; and

3. Rationalise its international operations

Malaysia and Brunei are now the only remaining oil net exporting countries in Southeast Asia. Increasing consumption has been seen across the region and oil production has been falling in the region as a whole. Petronas has geared up its exploration and production activities to meet increasing demand. For instance, 11 new production sharing contracts in Malaysia have been awarded by Petronas in 2011 compared to 4 in the previous year. Malaysia’s crude oil and condensate reserves remain healthy at 5.86bn barrels of oil equivalent as at Jan11, implying c.26 years of production. Malaysia: Declining oil production trend

Source: EIA

Global natural gas production in 2010

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We expect Malaysian O&G players to ride on Petronas’ rising capex and major development plans going forward. Petronas has been increasingly dishing out more contracts since early 2011. The government started the ball rolling in late 2010 when it granted tax incentives to enhance the commercial viability of abandoned marginal fields.

Sector Focus

Malaysia Oil & Gas

HWANGDBS

Malaysia: New tax incentives to develop marginal fields - Reduced tax rate from 38% to 25% for marginal oil field development to improve commerciality of the developments

- Accelerated Capital Allowance to 5 years from 10 years for marginal oil field development

- Waiver of export duty on oil produced and exported from marginal oil fields

- Investment tax allowance of between 60%-100% on capex to be deducted against statutory income to encourage the development of capital-intensive projects

- Allow Qualifying Exploration Expenditure transfer between non-contiguous petroleum agreement with the same partnership or sole proprietor to enhance contractors' risk taking and encourage a higher level of exploration activity Source: Petronas

Following the tax incentives, Petronas awarded two marginal fields under risk service contracts (RSC) – Berantai field to Petrofac, SapuraCrest Petroleum and Kencana Petroleum, and Balai clusters to Roc Oil, Dialog and Petronas Carigali.

Major developments announced in 2011 include: - US$20bn RAPID project in Pengerang, Johor

- RM15bn North Malay Basin project at blocks PM301, PM302 and PM325

- RM10bn ExxonMobil enhanced oil recovery (EOR) at Tapis field and the Telok gas development

- US$12bn Shell EOR project that involves 9 oil fields at Baram Delta off Sarawak and 4 fields in North Sabah

- RM5bn Dialog independent deepwater terminal at Pengerang, Johor

- US$1.7bn marginal field development at Berantai and Balai cluster fields

- RM1.1bn Petronas Gas LNG regasification project at Sungai Udang Port, Melaka

- US$1.5bn new world-scale fertilizer plant in Sipitang, Sabah.

Malaysia: Notable contracts secured by O&G players in 2011

Date Contract Value (RMm) Company Client

8/12/2011 Fabrication of LNG processing facility 1,000 Kencana Bechetel International Inc3/11/2011 EEPCIC of integrated platform 1,400 MMHE ExxonMobil1/11/2011 Provision of Semi-sub drilling rig 223 UMW Petronas Carigali1/11/2011 Chartering of 3 pipe-laying support vessels 4,340 SapuraCrest Petrobras

12/10/2011 EPCC of waste-to-energy plant 638 KNM Octagon Consolidated Berhad3/10/2011 Construction of PSV 100 SapuraCrest (50%-own Tanjung Offshore

30/9/2011 Balnaves field FPSO 1,460 Bumi Armada Apache Energy16/8/2011 FSU Lekas conversion 103 MMHE MISC11/8/2011 D1 field FPSO 1,922 Bumi Armada ONGC26/7/2011 Idle well reactivation project 170 Uzma1/7/2011 APLNG pipe coating 137 Wah Seong APLNG13/6/2011 EPCIC of SOGT mooring buoy 52 Alam Maritim Samsung Engineering Malaysia1/6/2011 EPCC for 1st phase of Pengerang terminal 1,900 Dialog Pengerang Independent Terminals

13/5/2011Fabrication of E8 and F13 gas compression modules for E11P-B platform

250 Kencana Sarawak Shell

6/5/2011 FPSO Cendor conversion 850 MMHE MISC26/4/2011 Kebabangan substructure fabrication 208 Kencana KPOC25/4/2011 Kebabangan Topsides fabrication 1,150 Sime Darby KPOC29/3/2011 oil field 216 Kencana Petrofac17/3/2011 Provision of Jack-up drilling rig, Naga 3 125 UMW Petronas Carigali2/3/2011 Supply of Low Pressure System (LPS) 200 Uzma Petronas28/2/2011 MOPU and well-head support structure 115 Kencana Petrofac7/2/2011 Topside maintenance contract 800 Dayang Petronas Carigali31/1/2011 Berantai oil field 2,400 SapuraCrest Petronas26/1/2011 LNG regasification project 1,070 Muhibbah, Ranhill Petronas Gas1/1/2011 Sepat marginal field 840 Bumi Armada Petronas

Source: Companies, DBS Vickers

Sector Focus

Malaysia Oil & Gas

HWANGDBS

Malaysia: Potential contracts from announced O&G developments

Project Value Timeline Potential O&G beneficiaries (RMm) Refinery & Petrochemical Integrated Development

60,000 2012-2016 Dialog, Petronas Chemicals, Wah Seong

Pengerang independent deepwater terminal 5,000 2011-2020 Dialog

ExxonMobil's Enhance Oil Recovery 10,000 2011-2013 MMHE, Kencana, Bumi Armada, SapuraCrest, Wah Seong, Alam Maritim, Tanjung Offshore, Perdana Petroleum

Shell's chemical EOR 36,000 n.a. Bumi Armada, Kencana, SapuraCrest, Wah Seong, Uzma

Pan Malaysia hook-up & commissioning 5,000 2012 Dayang, Petra Energy, Kencana Malikai deepwater field 3,000 2011-2012 MMHE, Kencana, SapuraCrest, KNM, Wah Seong,

Perisai Petroleum, Alam Maritim, Petra Perdana

22 marginal oil fields 54,560 2012-2015 MMHE, Bumi Armada, Kencana, Wah Seong, SapuraCrest, Dayang, Petra Energy, Perisai Petroleum, Alam Maritim, Tanjung Offshore, Petra Perdana, Dialog

Petronas drilling plans of 50 wells next 3 years

n.a. 2011-2013 Kencana, SapuraCrest, Wah Seong, KNM, Alam Maritim, Tanjung Offshore, Petra Perdana

Floating solutions for Belud, Desaru, Terantai, Dahlia, St Joseph fields

n.a. 2012-2014 Bumi Armada, MISC, MMHE, Kencana

Malaysia: Progress of announced projects

Projects Progress

Refinery & Petrochemical Integrated Development

Detailed feasibility is to be concluded by end-12, but Petronas is targetting to achieve commissioning by 2016

Pengerang independent deepwater terminal Dialog has been awarded the 60-year mandate to develop the project and construction for 1st phase has commenced with 5% completion achieved

ExxonMobil's Enhance Oil Recovery Tapis, Guntong, Samarang and Bokor projects have been undertaken by a Petronas-Schlumberger alliance which is expecting water-alternating-gas EOR. New central processing platforms may be required

Shell's chemical EOR Heads of agreement for 2 PSCs have been signed. US-based EOR specialist, Water Standard has been roped in for the EOR projects

Pan Malaysia hook-up & commissioning Contracts are likely to come by 2012 Malikai deepwater field Final investment decision should be forthcoming by 2012 as Shell will re-tender the fabrication

contract

22 marginal oil fields Two unprecedented Risk Service Contracts were awarded last year, and there will be more this year.

Petronas plans to drill 50 wells over the next three years

Exploration activity has picked up with the discovery of a few more fields in Malaysia

Floating solutions for Belud, Desaru, Terantai, Dahlia, St Joseph fields

FPSO award for Belud is expected very soon. Fast-track production of West Desary discovery (next to Cendor at PM304) has been signed and MOPU will be deployed by 4Q12

Floating LNG Kinawit, offshore Sarawak with a total capacity of 1.2m MT to be commissioned by end-2015; possible at Rotan field offshore Sabah as well

Source: Various, DBS Vickers

Sector Focus

Malaysia Oil & Gas

HWANGDBS

More RSCs next year. There are another 22 marginal oilfields identified for development, and we could see more RSC by mid-2012 given that bidders would submit proposals by 1Q12. Petronas has given the oil companies liberty to devise their own game plans for the oilfields, subject to Petronas’ approval. The oil companies are also allowed to choose the fields and their preferred local partners. RM15bn North Malay Basin project. US-based Hess has issued an expression of interest for a 3-year FPSO charter to support early production at its multi-platform North Malay Basin development off Peninsular Malaysia. The development covers six gas fields in Block PM301 - Kamelia, Zetung, Gajah, Melati, Angerik and Kezumba, and Berganding in Block PM325. Going by Petronas’ ambitious timeline for first gas by 2013 due to the critical gas supply shortage in Peninsular Malaysia, the contract might be awarded soon so that the FPSO can start operation by then. We understand Bunga Dahlia and Teratai fields in Block PM302 will be developed as part of the North Malay Basin project. Opportunities in deepwater projects, in addition to higher production at mature fields. Kikeh oil field is currently Malaysia’s sole producing deepwater field. It came on-stream in 2007. Gross production is about 52,000 barrels of oil per day (bpd), and it is targeting 120,000 bpd in the near term. The Gumusut- Kakap oil field will come on-stream next, in 2012/2013. Malikai field, the third project to be developed by MMHE (final investment decision by end 2012), is expected to come on-stream by 2014 with output up to 150,000 bpd. Petronas may expedite the development of other proven deepwater fields in Malaysia to boost production further, to take advantage of the strong oil prices. Malaysia: Deepwater fields Field Estimated Water depth Operator

reserves(m barrels) (m)

Kikeh 400 1326 Murphy OilUbah Crest 215 1430 ShellKamunsu 401 737 ShellGumusut-Kakap 400-900 1000 ShellPisagan 56 1465 ShellMalikai 108 800 ShellJangas 81 >1000 Murphy Oil Source: ODS-Petrodata

Floating LNG facility. Petronas plans to make a final investment decision on a floating liquefied natural gas (FLNG) facility by end-2012, which could make it the first with FLNG production in early 2015. Front-end engineering and design (FEED) work on the 300m-long FLNG vessel by France’s Technip and South Korea’s Daewoo Shipbuilding & Marine Engineering may be concluded by the end of the year. Huge potential for EOR in Malaysia. Petronas is also focusing on enhanced oil recovery (EOR) because of declining output at mature producing fields, where the average recovery factor is only half the 46% average in the North Sea. It has plans to implement EOR technology programs that focus on water alternating gas EOR and chemical EOR at its fields in Malaysia such as Angsi and Dulang. Four key contracts have gone to MMC Oil & Gas Engineering, Ranhill Worley, Technip and Aker Solutions for the Sumandak, Dulang, Tapis and Bokor oil fields. While implementing EOR is expensive with cost of deploying chemical EOR running up to US$13/barrel, the initiative will be supported by the new tax incentives for marginal field development as well as still bullish oil prices despite a weak global economic outlook. ExxonMobil’s EOR project gaining traction. Following the announcement of the RM10bn ExxonMobil Tapis EOR project in Jan11, MMHE was recently awarded the RM1.5bn central processing platform fabrication contract. We expect more contracts from six other fields - Seligi, Guntong, Semangkok, Irong Barat, Tabu and Palas - that are part of the deal announced by ExxonMobil and Petronas.

Sector Focus

Malaysia Oil & Gas

HWANGDBS

Shell’s EOR project largest in the world. The US$12bn heads of agreement was signed by Petronas and Shell in Nov11. They are for two 30-year PSC for EOR projects off East Malaysia. Both parties aim to increase recovery factor at the North Sea and Baram Delta fields from 36% to 50%, and extend field life to beyond 2014. The Baram Delta EOR project covers Bokor,

Bakau, Baram, Baronia, Betty, Fairley Baram, Siwa, Tukau and West Lutong oil fields. Meanwhile, the North Sabah EOR development comprises the St. Joseph, South Furious, SF30 and Barton fields. Combined, these development opportunities could be the largest offshore EOR project in the world, according to Shell.

Malaysia: EOR projects to be undertaken

EOR project Partners Location Remarks

Tapis ExxonMobil Terengganu Ranhill Worly appointed FEED contractor, fabrication contract awarded to MMHEGuntong ExxonMobil Terengganu Conceptual studies and initial development phaseSeligi ExxonMobil TerengganuSemangkok ExxonMobil TerengganuIrong Barat ExxonMobil TerengganuTabu ExxonMobil TerengganuPalas ExxonMobil TerengganuBokor Petronas Carigali Sarawak Central processing platform, 6-7 production and injection platforms plannedSamarang Petronas Carigali Sabah Central processing platform, 2 satellite platforms plannedAngsi ExxonMobil Terengganu US' Water Standard is to pioneer vessel-based chemical EORSt Joseph Shell SabahSouth Furious Shell SabahBarton Shell SabahSF30 Shell Sabah9 fields in Baram Delta Shell SarawakDulang Petronas Carigali Terengganu Multiple wellhead or injection platforms, Technip apppointed FEED contractorTemana Petronas Carigali Sarawak Multiple wellhead or injection platforms, MMC appointed FEED contractor

Still early stage

Shell just signed Heads of Agreement with Petronas for 2 PSCs for the fields to undertake EOR projects

Source: Various, DBS Vickers

Malaysia: Field locations

Source: Petronas

Sector Focus

Malaysia Oil & Gas

HWANGDBS

Marginal oil fields – a game-changing development We are particularly excited about marginal oil fields, which are part of Petronas’ incentivised development to stimulate production at technically-challenging reserves and stranded marginal fields. Petronas does not restrict development plans for these marginal fields, but foreign players with qualified technical expertise and sound financials must rope in local listed partners with at least 30% equity ownership. O&G players with proven track record are set to benefit from this expertise-sharing requirement. And this could be the game-changing plan for local players to move up the value chain. Malaysia has 106 marginal oil fields with combined 580m barrels of oil reserves, and Petronas has firm plans to develop a quarter of these fields. A marginal oil field is defined as producing 30m barrels of oil equivalent or less. Marginal oil field development is governed by risk service contracts (RSC) instead of the common production sharing contracts (PSC), because the challenging hydrocarbon characteristics had forced some PSC contractors to relinquish marginal fields because the contract terms made the fields commercially unviable. Under a RSC, Petronas owns the marginal oil field and all the production, but the contractor’s capex is fully recoverable. Petronas essentially pays a fee for the contractor’s technical expertise to develop infrastructure and provide expertise to extract oil from the marginal fields. The kicker is a performance bonus if the contractor exceeds its agreed KPIs. Unlike a PSC, a RSC participant does not enjoy upside from higher oil prices, but its risk is limited as capex spent will be reimbursed by Petronas.

We expect the favorable RSC terms to entice more Malaysian O&G players to participate in subsequent marginal field projects, especially after they see the results of the first two RSCs awarded in Jan11 and Aug11. However, companies with limited financing may be ruled out as RSC operators would have to fork out upfront investment capital based on their equity shares. We believe Bumi Armada is poised to secure the next RSC in 2012, given its strong balance sheet, outstanding track record and synergistic oil field services that fits into the criteria for a RSC. Among listed O&G players in Malaysia, Bumi Armada may be viewed as the best candidate by foreign oil players to bid for marginal oil fields. Bumi Armada’s impeccable FPSO expertise, strong fleet of 43 OSVs, and T&I services, will support its bids. In addition, its new core division - oil field services (OFS) – is a sign that it is keen to leverage on its strong O&G services to bid for marginal fields.

Malaysia: First two RSCs awarded in 2011

Berantai field Balai cluster fieldsParties Petrofac (50%), SapuraCrest (25%), Kencana (25%) Roc Oil (48%), Dialog (32%), Petronas Carigali (20%)Investment US$800m (excluding FPSO) US$850m-950mDuration 9 years 15 yearsLocation 150km offshore Terengganu (PM 309) offshore Bintulu, SarawakDevelopment

1 well-head platform with 18 wells tied in to existing platform, 1 FPSO

Predevelopment phase in 2H11 for 18months before development phase (installation of platforms, tie in to existing infrastructure)

Target First gas by Dec11 Production within 24months upon commencement of development phase


Sector Focus

Malaysia Oil & Gas

HWANGDBS

Malaysia: Likelihood of Malaysian O&G companies securing marginal fields

Companies Chances Remarks

Net

gearing (x)

Bumi Armada High 0.50 Solid balance sheet, strong execution track record and synergistic O&G services

especially the FPSO solution makes it an attractive candidate

Dialog High Net cash Strong balance sheet coupled with its track record in integrated technical services makes it a credible partner for marginal field development

SapuraCrest High 0.12 Forte in the transportation & installation of platform & pipeline and its drilling

expertise comes in handy for marginal field development

Kencana Petroleum High 0.03 Core competency in fabrication, asset ownership of drilling rig and offshore service vessels provide complementary O&G services

MMHE Moderate Net cash Its RM2.3bn net cash position may come in handy, but the company may need to focus on executing its RM3.7bn outstanding order book currently

Alam Maritim Moderate 0.94 Potential local partner given its fleet of 41 offshore service vessels but limited capability in upstream exploration and development

Dayang Enterprise Moderate Net cash Its track record in topside maintenance and hook-up commissioning services is a plus point, but its participation in marginal field could be constrained by its huge order book of RM1.5bn (lasting till FY16)

Perdana Petroleum Low 0.48 Unlikely to participate in marginal fields due to its weak operational performance and high operating expenses due to sales-and-leaseback agreement for financing its vessels.

Tanjung Offshore Low 1.38 Loss-making engineering division severely erodes its profitability, and its current high gearing level may not allow more fund-raising

Perisai Petroleum Low 0.67 Its pipe-laying barge is under long-term charter until mid-13, hence limiting mobilisation for its own use. The proposed acquisition of MOPU will also be under a two-year charter upon completion of acquisition

Wah Seong Low 0.21 Its pipe-coating expertise offers little synergy to the development of marginal oil field which does not require extensive piping facilities

KNM Low 0.38 Limited value-added capability for marginal field development


Sector Focus

Malaysia Oil & Gas

HWANGDBS

Booming downstream activity New world-scale fertiliser plant in Sabah. In Oct11, Petronas Chemicals awarded the basic and detailed engineering and construction alliance contract for the Sabah Ammonia-Urea (SAMUR) project to Mitsubishi Heavy Industries Ltd, Apex Energy Sdn Bhd and PT Rekayasa Industri. Construction is likely to start in 2Q12 with targeted completion in 2015. The SAMUR project, estimated to cost US$1.5bn, will be located on 166 acres of land in Sipitang Industrial Park, Sabah, to take advantage of natural gas from the state’s offshore fields. The complex will house an ammonia plant (2,100 MT /day), a urea plant (3,500 MT/day) and a granulation plant, as well as integrated utility units and jetty facilities. Specialty chemicals plant with BASF. Petronas Chemicals signed a MoU with BASF in Dec10 to undertake a joint feasibility study on producing specialty chemicals in Malaysia. It is expected to involve RM4bn total investment. The study is targeted to be completed by the end of this year. We understand it involves a Super Absorbent Polymer (SAP) plant and expansion of the JV’s (BASF Petronas Chemicals) existing facilities in Gebeng, Pahang. More LNG facilities. Pressing need for more gas in the country as demand outpaces supply has caused the current critical gas shortage faced by Tenaga Nasional. Petronas recently announced that it plans to build the 4th LNG terminal in Lumut due to increasing demand for gas in Peninsular Malaysia, following plans for LNG terminals in Malacca, Pengerang and Lahad Datu.

New LNG facilities in Melaka by July 2012. The new LNG regasification facility in Melaka will ease gas supply constraints in Peninsular Malaysia and allow for the possible extension of first generation power purchase agreements (PPA). Petronas Gas is developing LNG facilities and services in the vicinity of Sungai Udang Port, Melaka. The regasification plant will have a maximum capacity of 3.8m MT p.a. and be completed by Jul12. This re-gasification project is owned and operated by Petronas Gas, which has awarded the RM1.08bn plant construction contract to a consortium comprising Perunding Ranhill Worley Sdn Bhd (70%) and Muhibbah Engineering (50%), in Jan 11. RM60bn RAPID project in Pengerang. Petronas announced in May11 that it would undertake a detailed feasibility study on the Refinery and Petrochemicals Integrated Development (RAPID) project - potentially worth US$20bn (~RM60bn) - in Pengerang, southern Johor. RAPID will comprise a crude oil refinery (300,000 barrels/day), a naphtha cracker (3m MT ethylene, propylene and other olefins/ year), and a petrochemicals and polymer complex that will produce differentiated and highly-specialised chemicals. The project is expected to be commissioned in 2016 and Petronas Chemicals’ involvement is likely to be in petrochemicals, which is estimated to cost US$10bn (~RM30bn). The feasibility study will be completed by Dec12.

Sector Focus

Malaysia Oil & Gas

HWANGDBS

Pengerang – Asia’s next oil storage hub The Malaysian government is striving to enhance midstream to downstream O&G activities by establishing a regional oil storage and trading hub to capitalise on rising crude oil consumption in Asia. Consumption is expected to grow by 420,000 barrels/day from 2010 to 2015. Singapore, one of the world’s top oil terminals, currently has 10m cbm storage capacity. But land scarcity in Singapore has presented neighboring state Johor the opportunity to capture spill-over demand. Therefore, the Johor state government initiated a pilot project to build an independent deepwater petroleum terminal (IDPT) in Pengerang, Johor. The public-private partnership MOU between the Johor state government, Vopak and Dialog was signed in 2009. The Pengerang project is expected to generate RM1.6bn in gross national income by 2020. It is one of the key projects identified by the Malaysian government under the Economic Transformation Program to propel domestic economic growth. As the first in Malaysia, the Pengerang IDPT has several distinct advantages: (i) Deepwater jetty facilities capable of accommodating

VLCCs and ULCCs allow tankers to collect or deliver crude oil without a costly buoy mooring system; and

(ii) Its sheltered harbour next to international sea lanes provides captive demand for tank storage facilities.

Pengerang Project: Proposed site

Source: Dialog

The whole Pengerang project will take c.10 years to develop. It will be the first IDPT and storage facility in Malaysia. Eventually, the terminal will boast a 5m cbm storage capacity that is capable of handling, storing, blending and distributing crude oil and petroleum products. To put things in perspective, the Pengerang IDPT is 10 times bigger than the Kertih terminal, which consists of petrochemical tanks with 400,000 cbm storage capacity. In Oct10, Dialog was awarded a 60-year exclusive mandate by the Johor state government to develop the Pengerang IDPT. The detailed feasibility study and environmental impact assessment was approved by the Department of Environment in Apr11. Work has started since then, with 5% completion achieved for phase 1 in Dec11. In addition, Benalec was granted the right to reclaim 3,485 acres of land in Tanjung Piai, which is envisioned to be an O&G industrial park. It will ride on expected demand from O&G players in Jurong who which to expand storage capacity. Benalec has also been granted the right to claim 1,760 acres on the coast of Pengerang. The projected gross development value (GDV) at Pengerang is RM3m per acre and RM4m per acre for Tanjung Piai. Development works at Pengerang would take 10 years, and Tanjung Piai 10 to 15 years. Petronas’ US$20bn RAPID project is seen as part of the blueprint to grow southern Johor into an Asian oil storage hub. While RAPID’s feasibility study will only be concluded by end-2012, there is a strong chance of it taking off due to urgent need for Petronas Chemicals to expand production capacity, a trend seen at other regional players. Meanwhile, Tanjung Piai and Pengerang terminals are likely to complement Jurong Island in terms of offering petroleum storage terminals. We expect RAPID to complement and turn southern Johor into the epicentre of O&G activities in the region, like the Amsterdam-Rotterdam oil hub.

Sector Focus

Malaysia Oil & Gas

HWANGDBS

Stock Selection Bumi Armada (Buy, RM5.00 TP) remains our top pick in the Malaysian O&G sector, given its superior execution track record, synergistic O&G services and strong balance sheet to take on major projects. Bumi Armada is likely one of the most qualified players in the country to undertake Petronas’ projects such as FPSOs for EOR projects and marginal field development. We are confident Bumi Armada will clinch a marginal field project. Excluding catalyst projects from Petronas, we project Bumi Armada to register strong 26% earnings CAGR over 3-years. Its RM7.2bn order book (excluding JV’s D1 FPSO in India worth RM1.9bn) implies 5.6x book-to-bill ratio, and will ensure long-term earnings visibility given that 70% is anchored by long term FPSO contracts (expiring in 2-8 years) that are likely to be extended under its RM3bn FPSO extension options. We conservatively assumed one new FPSO contract annually, so an additional contract in early FY12 could boost earnings by 10%. Dialog (Buy, RM3.30 TP) is one of the beneficiaries of Petronas’ rising capex. As the developer of the RM5bn Pengerang independent deepwater petroleum terminal, Dialog will not only benefit from the RM1.9bn construction order book for the phase 1, but also stand to generate recurring income from its 46% stake in the terminal. There will be huge spillover from Petronas’ US$20bn RAPID project, in which Dialog could play a significant role. Kencana (Not rated) and SapuraCrest (Not rated) are leading contenders for Petronas’ projects going forward, as a merged entity, Sapura Kencana. It will boast a full spectrum of O&G services ranging from engineering, procurement and construction to transport and installation. Its combined RM13bn order book is the largest among local O&G players. Sapura Kencana might secure its 2nd marginal field RSC next year as well, given its integrated O&G services and healthy balance sheet. Meanwhile, Petronas’ deepwater fabrication arm, MMHE (Fully Valued, RM5.00 TP) may not benefit as much as other fabricators given the delays at its existing projects, namely the Gumusut-Kakap floating production system. We remain concerned over its earnings visibility due to slow major order replenishment. Re-tendering of the Malikai tension leg platform project (c.RM1bn) by Shell could see the contract go to other more competitive international yards.

Offshore support vessels (OSV) players such as Tanjung Offshore (Fully Valued, RM0.70 TP), Perdana Petroleum (Fully Valued, RM0.55 TP), Perisai Petroleum (Buy, RM0.85 TP) and Alam Maritim (Buy, RM0.90 TP) may not benefit directly from Petronas’ mega projects in the near term. But there will be more marine chartering jobs as the projects near development phase. To put things into perspective, O&G engineering, procurement and fabrication contracts are awarded first, followed by pipe-laying, installation, hook-up & commissioning, and marine chartering services. Hence, we believe 2012 will be a growth year for OSV players in terms of marine chartering contracts. Premised on heightened activity in the Malaysian O&G sector, OSV players will see strong earnings recovery after a slump in the past two years. Dayang (Buy, RM2.70 TP) will benefit from increasing O&G activities in 2012, given its niche expertise in topside maintenance and hook-up commissioning (HUC) services, which are relevant to the development of marginal oil fields and EOR projects. Its strong execution track record, coupled with a solid balance sheet (RM140m net cash), make it a strong candidate for more maintenance and HUC contracts. Wah Seong (Buy, RM2.50 TP) – Malaysia’s sole deepwater-capable pipe-coating specialist – will continue to focus on its core pipe-coating expertise. Petronas will continue to dish out more projects under initiatives to develop new fields and replace ageing facilities. On the other hand, KNM (Fully Valued, RM0.70) might see weak contract wins in Malaysia because of poor execution record and disappointing results. Its recent result had been hit by RM143m impairment and provisional charges. Petronas Chemicals (Fully Valued, RM5.50 TP) is likely to leverage on the strong oil prices to gain from its petrochemical products, but we remain concerned over the lack of capacity growth for the next four years. The US$20bn RAPID project is still under detailed feasibility study until end-2012 and commissioning may only be in 2016.

Sector Focus

Malaysia Oil & Gas

HWANGDBS

Risks Crude oil prices. Despite a anticipated boom in Malaysia’s O&G sector supported by Petronas’ record high capex for the next five years, the huge spending could be derailed if oil prices tumble from c.US$100/barrel currently. However, it is unlikely to fall below US$80. We view that as long as oil prices remain above US$70, Petronas will continue to invest heavily in exploration and production.

Project delays. This concern is not new, as we have seen delays and pullback of development projects over the years for various reasons, from low oil prices to management reshuffling. The difference now is that the risks are more diluted. Petronas is committed to arrest declining hydrocarbon production in the country and the O&G sector has been identified as a key sector to propel Malaysia into a high-income nation.

O&G peer comparison (Larger cap) Company Rating Price TP Mkt Cap PE (x) PBV (x) EV/ EBITDA ROE EBIT margin

(RM) (RM) (RMm) CY11 CY12 CY11 CY12 (x) (%) (%)

Bumi Armada Buy 4.07 5.00 11,919 32.0 20.3 3.3 2.9 16.4 11.0 36.7

MMHE FV 5.72 5.00 9,152 34.3 25.1 3.7 3.3 17.5 19.6 9.0

Kencana NR 2.93 NR 5,840 21.6 18.0 3.1 2.8 14.7 12.7 18.6

Sapura Crest NR 4.56 NR 5,822 19.4 15.9 4.1 3.4 10.8 16.3 11.8

Dialog Buy 2.64 3.30 5,296 32.4 29.5 6.7 5.1 23.1 24.6 13.7

Simple average 27.9 21.8 4.2 3.5 16.5 16.8 17.9

FV – Fully Valued, NR – Not rated Source: Bloomberg, DBS Vickers O&G peer comparison (Small-mid cap)Company Rating Price TP Mkt Cap PE (x) PBV (x) EV/ EBITDA ROE EBIT margin

(RM) (RM) (RMm) CY11 CY12 CY11 CY12 (x) (%) (%)

Wah Seong Buy 2.05 2.50 1,545 13.7 12.4 1.6 1.4 6.4 5.4 7.4

KNM FV 1.01 0.70 1,011 n.m. 14.6 0.6 0.6 10.3 6.8 6.3

Dayang Enterprise Buy 1.80 2.70 990 11.8 9.9 1.8 1.6 6.8 18.2 32.6

Coastal Contract Buy 1.97 3.25 952 5.1 4.9 1.2 1.0 3.7 33.3 30.6

BHIC Buy 3.62 4.00 899 n.m. 10.9 2.1 1.8 9.6 14.7 13.0

Perisai Petroleum Buy 0.79 0.85 596 17.6 7.9 1.8 1.5 4.7 4.4 40.3

Alam Maritim Buy 0.75 0.90 586 20.5 11.2 1.2 1.1 12.9 -2.9 1.4

Petra Perdana FV 0.76 0.55 376 n.m. 27.0 0.7 0.7 9.0 -14.3 n.m.

Scomi Group NR 0.29 NR 338 3.7 2.9 0.3 0.3 4.1 -18.6 1.1

Petra Energy NR 1.14 NR 245 103.6 9.5 0.8 0.7 13.6 0.8 3.0

Tanjung Offshore FV 0.79 0.70 230 40.7 13.8 0.6 0.6 6.6 1.8 7.0

Sealink Int'l NR 0.43 NR 213 n.a. n.a. n.a. n.a. n.a. 7.6 21.9

Simple average 27.1 11.4 1.2 1.0 8.0 4.8 15.0 FV – Fully Valued, NR – Not rated Source: Bloomberg, DBS Vickers

Sector Focus

Malaysia Oil & Gas

HWANGDBS

Stock Profiles

Sector Focus

Bumi Armada

HWANGDBS

Bloomberg: BAB MK EQUITY | Reuters: BUAB.KL

BUY RM4.07 KLCI : 1,513.54 Price Target : 12-Month RM 5.00 ( Potential Catalyst: New FPSO contracts, lucrative marginal oil field deal DBSV vs Consensus: Among the highest TP Analyst QUAH He Wei +603 2711 2222 [email protected]

Price Relative

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

4.3

4.5

Jul-11 Oct-11

RM

89

109

129

149

169

189

209

Relative Index

Bumi Armada (LHS) Relative KLCI INDEX (RHS)

Forecasts and Valuation FY Dec (RM m) 2010A 2011F 2012F 2013F

Turnover 1,241 1,576 2,218 2,621 EBITDA 703 837 1,217 1,458 Pre-tax Profit 383 414 653 755 Net Profit 351 373 587 679 Net Pft (Pre Ex.) 339 373 587 679 EPS (sen) 15.8 12.7 20.1 23.2 EPS Pre Ex. (sen) 15.3 12.7 20.1 23.2 EPS Gth (%) 26 (20) 58 16 EPS Gth Pre Ex (%) 56 (17) 58 16 Diluted EPS (sen) 15.8 12.7 20.1 23.2 Net DPS (sen) 0.0 0.0 0.0 0.0 BV Per Share (sen) 39.5 121.8 141.8 165.0 PE (X) 25.7 32.0 20.3 17.5 PE Pre Ex. (X) 26.6 32.0 20.3 17.5 P/Cash Flow (X) 35.3 15.8 11.7 10.2 EV/EBITDA (X) 17.3 17.7 13.0 11.4 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 10.3 3.3 2.9 2.5 Net Debt/Equity (X) 3.6 0.8 0.9 1.0 ROAE (%) 45.4 16.8 15.2 15.1 Earnings Rev (%): - - - Consensus EPS (sen): 13.2 19.8 24.2 Other Broker Recs: B: 7 S: 1 H: 5 ICB Industry : Industrials ICB Sector: Industrial Transportation Principal Business: Malaysia-based international O&G offshore services provider with four synergistic units, namely FPSO, OSV, T&I and OFS Source of all data: Company, DBS Vickers, Bloomberg

At A Glance Issued Capital (m shrs) 2,928 Mkt. Cap (RMm/US$m) 11,919 / 3,761 Major Shareholders Objektif Bersatu (%) 42.4 Ombak Dami (%) 11.6 Wijaya Sinar (%) 7.3 Free Float (%) 38.7 Avg. Daily Vol.(‘000) 2,771

Exponential growth ahead • Strong candidate for lucrative marginal field risk

service contract

• Beneficiary of rising demand for FPSO solutions in the region

• Maintain Buy and RM5.00 TP

Best bet for Petronas’ RSC. We expect Bumi Armada to secure the lucrative risk service contract (RSC) for Petronas’ marginal fields next year. Its excellent track record and synergistic O&G services, especially FPSO solutions, may appeal to foreign oil companies seeking to rope in a local partner for RSCs. We understand Bumi Armada is keen to bid for marginal fields and its new oil field services division sends a strong signal that it is leveraging on its expertise to aggressively bid for RSCs, which are believed to command 11-20% IRR. FPSO tenders picking up. Bumi Armada will bid for more FPSO contracts in Malaysia as more jobs take off. The FPSO tender for Petronas’ RM15bn North Malay Basin development (PM301 and PM325) has started, and the contract might be awarded by year-end to meet production by 2013. Petronas is also likely to deploy FPSO solutions to its Bunga Dahlia and Teratai fields (PM302). Meanwhile, the FPSO tender for ONGC’s Cluster 7 marginal fields in India has started and Bumi Armada is likely to bid. It had purchased an Aframax tanker in Dec11 (similar to its option for the D1 FPSO bid), which suggests another FPSO project in the pipeline. Maintain Buy. Bumi Armada is our high conviction Buy for its long-term earnings visibility that is supported by a RM7.2bn firm order book (exclude JV’s D1 FPSO in India worth RM1.9bn) and strong 3-year earnings CAGR of 26%. Its geographically diversified earnings base and large exposure to the growing O&G sectors in Asia and Africa will propel growth over the next few years.

Sector Focus

Bumi Armada

HWANGDBS

Income Statement (RM m) Balance Sheet (RM m) FY Dec 2010A 2011F 2012F 2013F FY Dec 2010A 2011F 2012F 2013F

Turnover 1,241 1,576 2,218 2,621 Net Fixed Assets 3,715 6,114 7,656 9,082 Cost of Goods Sold (636) (879) (1,205) (1,432) Invts in Associates & JVs 10 17 49 81 Gross Profit 605 696 1,013 1,189 Other LT Assets 302 334 334 334 Other Opng (Exp)/Inc (150) (201) (287) (338) Cash & ST Invts 278 525 244 312 Operating Profit 456 495 727 851 Inventory 1 2 2 3 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 190 337 462 504 Associates & JV Inc (1) 8 32 32 Other Current Assets 301 337 476 650 Net Interest (Exp)/Inc (82) (89) (106) (128) Total Assets 4,795 7,667 9,223 10,966 Exceptional Gain/(Loss) 12 0 0 0 Pre-tax Profit 383 414 653 755 ST Debt 1,398 935 1,135 1,335 Tax (33) (41) (65) (75) Other Current Liab 500 652 921 1,084 Minority Interest 0 0 0 0 LT Debt 2,021 2,500 3,000 3,700 Preference Dividend 0 0 0 0 Other LT Liabilities 2 4 4 4 Net Profit 351 373 587 679 Shareholder’s Equity 875 3,566 4,154 4,833 Net Profit before Except. 339 373 587 679 Minority Interests 1 10 10 10 EBITDA 703 837 1,217 1,458 Total Cap. & Liab. 4,795 7,667 9,223 10,966 Sales Gth (%) 69.6 26.9 40.8 18.1 Non-Cash Wkg. Capital (8) 24 19 73 EBITDA Gth (%) 52.6 19.1 45.5 19.7 Net Cash/(Debt) (3,141) (2,910) (3,892) (4,724) Opg Profit Gth (%) 94.5 8.7 46.8 17.1 Net Profit Gth (%) 26.4 6.2 57.7 15.7 Effective Tax Rate (%) 8.5 10.0 10.0 10.0 Cash Flow Statement (RM m) Rates & Ratio FY Dec 2010A 2011F 2012F 2013F FY Dec 2010A 2011F 2012F 2013F

Pre-Tax Profit 383 414 653 755 Gross Margins (%) 48.7 44.2 45.7 45.4 Dep. & Amort. 248 334 459 574 Opg Profit Margin (%) 36.7 31.4 32.8 32.5 Tax Paid (29) (15) (41) (65) Net Profit Margin (%) 28.3 23.6 26.5 25.9 Assoc. & JV Inc/(loss) 1 (8) (32) (32) ROAE (%) 45.4 16.8 15.2 15.1 Chg in Wkg.Cap. 150 55 119 111 ROA (%) 8.1 6.0 7.0 6.7 Other Operating CF (498) (26) (139) (175) ROCE (%) 10.9 7.9 8.5 8.4 Net Operating CF 255 753 1,018 1,168 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 Capital Exp.(net) (1,000) (2,000) (2,000) (2,000) Net Interest Cover (x) 5.5 5.6 6.9 6.6 Other Invts.(net) (4) 0 0 0 Asset Turnover (x) 0.3 0.3 0.3 0.3 Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 55.1 61.1 65.8 67.3 Div from Assoc & JV 16 0 0 0 Creditors Turn (avg days) 466.9 361.3 353.5 392.4 Other Investing CF 0 0 0 0 Inventory Turn (avg days) 0.9 1.0 1.0 1.1 Net Investing CF (988) (2,000) (2,000) (2,000) Current Ratio (x) 0.4 0.8 0.6 0.6 Div Paid 0 0 0 0 Quick Ratio (x) 0.2 0.5 0.3 0.3 Chg in Gross Debt 734 731 700 900 Net Debt/Equity (X) 3.6 0.8 0.9 1.0 Capital Issues 0 0 0 0 Net Debt/Equity ex MI (X) 3.6 0.8 0.9 1.0 Other Financing CF 3 0 0 0 Capex to Debt (%) 29.3 58.2 48.4 39.7 Net Financing CF 737 731 700 900 Z-Score (X) 2.2 2.3 2.1 1.8 Currency Adjustments (24) 0 0 0 N. Cash/(Debt)PS (sen) (141.8) (99.4) (132.9) (161.3) Chg in Cash (20) (516) (282) 68

Opg CFPS (sen) 4.8 23.8 30.7 36.1 Free CFPS (sen) (33.6) (42.6) (33.5) (28.4) Quarterly / Interim Income Statement (RM m) Segmental Breakdown / Key Assumptions FY Dec 4Q2010 1Q2011 2Q2011 3Q2011 FY Dec 2010A 2011F 2012F 2013F

Turnover 0 376 393 404 Revenues (RM m) Cost of Goods Sold 0 (223) (250) (224) FPSO 553 602 907 1,149 Gross Profit 0 153 143 179 OSV 420 427 507 545 Other Oper. (Exp)/Inc 0 (40) (34) (51) T&I 268 309 496 526 Operating Profit 0 113 109 128 OFS 0 237 308 401 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 0 (1) 0 16 Total 1,241 1,576 2,218 2,621 Net Interest (Exp)/Inc 0 (17) (33) (33) Operating profit (RM m) Exceptional Gain/(Loss) 0 0 0 0 FPSO 179 187 281 356 Pre-tax Profit 0 95 76 111 OSV 89 77 101 120 Tax 0 (13) (15) (16) T&I 148 166 255 263 Minority Interest 0 0 (1) (3) OFS 0 24 37 52 Net Profit 0 82 60 93 Others 10 10 10 10 Net profit bef Except. 0 82 60 93 Total 427 463 685 801 EBITDA 0 185 183 246 Operating profit Margins FPSO 32.4 31.0 31.0 31.0 Sales Gth (%) (100.0) N/A 4.5 2.8 OSV 21.2 18.0 20.0 22.0 EBITDA Gth (%) (100.0) N/A (0.9) 34.5 T&I 55.3 53.5 51.5 50.0 Opg Profit Gth (%) (100.0) N/A (3.8) 17.6 OFS N/A 10.0 12.0 13.0 Net Profit Gth (%) (100.0) N/A (26.6) 53.6 Gross Margins (%) N/A 40.7 36.4 44.4 Total 34.4 29.4 30.9 30.6 Opg Profit Margins (%) N/A 30.2 27.8 31.8 Key Assumptions Net Profit Margins (%) N/A 21.8 15.3 22.9 new FPSO revenue N/A 0.0 109.5 328.5 EBIT margin 34.4 29.4 30.9 30.6 AHTS utilisation rate 0.7 0.8 0.9 0.9 Source: Company, DBS Vickers

Sector Focus

Dayang Enterprise Holdings

HWANGDBS

Bloomberg: DEHB MK EQUITY | Reuters: DEHB.KL

BUY RM1.80 KLCI : 1,513.54 Price Target : 12-Month RM 2.70 Potential Catalyst: Large order book win, vessel fleet expansion DBSV vs Consensus: Among highest TP Analyst QUAH He Wei +603 2711 2222 [email protected]

Price Relative

0.4

0.9

1.4

1.9

2.4

2008 2009 2010 2011

RM

63

83

103

123

143

163

183

203

Relative Index

Dayang Enterprise Holdings (LHS) Relative KLCI INDEX (RHS)


Turnover 255 379 478 504 EBITDA 100 124 148 148 Pre-tax Profit 83 102 122 129 Net Profit 68 84 100 106 Net Pft (Pre Ex.) 68 84 100 106 EPS (sen) 19.3 15.2 18.2 19.2 EPS Pre Ex. (sen) 19.4 15.2 18.2 19.2 EPS Gth (%) 52 (21) 19 6 EPS Gth Pre Ex (%) 52 (21) 19 6 Diluted EPS (sen) 19.3 15.2 18.2 19.2 Net DPS (sen) 12.8 5.0 5.0 5.0 BV Per Share (sen) 106.0 98.0 111.2 125.4 PE (X) 9.3 11.8 9.9 9.4 PE Pre Ex. (X) 9.3 11.8 9.9 9.4 P/Cash Flow (X) 9.8 11.4 9.6 7.9 EV/EBITDA (X) 5.4 6.4 5.2 4.8 Net Div Yield (%) 7.1 2.8 2.8 2.8 P/Book Value (X) 1.7 1.8 1.6 1.4 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 19.5 18.4 17.4 16.2 Earnings Rev (%): 7.0 3.9 1.2 Consensus EPS (sen): 16.0 18.2 19.0 Other Broker Recs: B: 6 S: 0 H: 0 ICB Industry : Oil & Gas ICB Sector: Oil Equipment; Services & Dist Principal Business: Offshore platform maintenance service provider

Source of all data: Company, DBS Vickers, Bloomberg

At A Glance Issued Capital (m shrs) 550 Mkt. Cap (RMm/US$m) 990 / 312 Major Shareholders Naim Holdings (%) 34.2 Ahmad Shahruddin Yusof (%) 12.1 Ling Suk Kiong (%) 10.0 Free Float (%) 30.1 Avg. Daily Vol.(‘000) 282

Smooth sailing • Strong earnings visibility supported by RM1.5bn

order book and RM450m tender book

• Leveraging on robust O&G activity in 2012

• Maintain Buy with RM2.70 Solid years ahead. Dayang has been delivering impressive profits this year, with 9M11 earnings up 42% YoY to RM71.3m, largely attributed to Petronas’ RM802m topside maintenance contract that was secured in Feb11. Quarterly operating margins have also been outstanding at 26%-39% since 2010. With RM1.5bn outstanding order book in hand, Dayang may be busy for at least another four years. Its tender book remains strong at RM450m and we are optimistic of its chances given its excellent track record in hook-up commissioning (HUC) and maintenance services Exciting prospects in 2012. We expect Dayang to benefit from more HUC and maintenance jobs next year, given that several of Petronas’ projects have taken off. Its new 200-bed workboat, Dayang Topaz, is scheduled for delivery by Jan12. Assuming a daily charter rate of RM75k/day for a 8-month charter, the new workboat will boost our FY12F earnings by RM8m. Dayang also has room to expand given its healthy balance sheet with RM142m net cash as at Sep11. It can expand its vessel fleet if more contracts are secured next year. Maintain Buy. Dayang is a bargain currently, trading at only 10x FY12 EPS. We are expecting 2-year earnings CAGR of 21%, premised on its large RM1.5bn order book. We reiterate our RM2.70 TP, which implies 50% upside potential.

Sector Focus

Dayang Enterprise Holdings

HWANGDBS


Turnover 255 379 478 504 Net Fixed Assets 216 270 290 309 Cost of Goods Sold (126) (201) (262) (285) Invts in Associates & JVs 0 0 0 0 Gross Profit 129 178 215 219 Other LT Assets 0 0 0 0 Other Opng (Exp)/Inc (44) (70) (88) (93) Cash & ST Invts 204 293 319 367 Operating Profit 85 108 127 126 Inventory 1 2 3 3 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 123 183 231 244 Associates & JV Inc 4 0 0 0 Other Current Assets 2 2 2 2 Net Interest (Exp)/Inc (6) (6) (6) 2 Total Assets 546 750 844 923 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 83 102 122 129 ST Debt 27 27 27 27 Tax (15) (19) (22) (23) Other Current Liab 60 108 139 151 Minority Interest 0 0 0 0 LT Debt 84 74 64 54 Preference Dividend 0 0 0 0 Other LT Liabilities 2 2 2 2 Net Profit 68 84 100 106 Shareholder’s Equity 373 539 612 690 Net Profit before Except. 68 84 100 106 Minority Interests 0 0 0 0 EBITDA 100 124 148 148 Total Cap. & Liab. 546 750 844 923 Sales Gth (%) 29.5 48.5 26.1 5.6 Non-Cash Wkg. Capital 66 79 96 97 EBITDA Gth (%) 62.2 24.3 18.7 0.1 Net Cash/(Debt) 93 192 228 286 Opg Profit Gth (%) 67.3 27.1 17.6 (0.8) Net Profit Gth (%) 51.8 23.1 19.2 5.7 Effective Tax Rate (%) 18.1 18.1 18.1 18.1 Cash Flow Statement (RM m) Rates & Ratio FY Dec 2010A 2011F 2012F 2013F FY Dec 2010A 2011F 2012F 2013F

Pre-Tax Profit 83 102 122 129 Gross Margins (%) 50.8 47.0 45.1 43.5 Dep. & Amort. 11 16 20 21 Opg Profit Margin (%) 33.4 28.6 26.7 25.1 Tax Paid (12) (5) (19) (22) Net Profit Margin (%) 26.7 22.1 20.9 20.9 Assoc. & JV Inc/(loss) (4) 0 0 0 ROAE (%) 19.5 18.4 17.4 16.2 Chg in Wkg.Cap. (17) (27) (21) (3) ROA (%) 13.5 12.9 12.5 11.9 Other Operating CF 3 0 0 0 ROCE (%) 15.1 15.7 15.5 14.0 Net Operating CF 64 87 103 125 Div Payout Ratio (%) 66.3 32.8 27.5 26.1 Capital Exp.(net) (39) (70) (40) (40) Net Interest Cover (x) 14.1 17.9 23.1 NM Other Invts.(net) 0 0 0 0 Asset Turnover (x) 0.5 0.6 0.6 0.6 Invts in Assoc. & JV 0 135 0 0 Debtors Turn (avg days) 141.6 147.5 158.1 171.7 Div from Assoc & JV 4 0 0 0 Creditors Turn (avg days) 118.8 143.1 155.7 169.4 Other Investing CF 0 0 0 0 Inventory Turn (avg days) 4.6 3.3 3.6 4.0 Net Investing CF (35) 65 (40) (40) Current Ratio (x) 3.8 3.6 3.3 3.5 Div Paid (18) (28) (28) (28) Quick Ratio (x) 3.8 3.5 3.3 3.4 Chg in Gross Debt 0 (10) (10) (10) Net Debt/Equity (X) CASH CASH CASH CASH Capital Issues 0 110 0 0 Net Debt/Equity ex MI (X) (0.2) (0.4) (0.4) (0.4) Other Financing CF 0 0 0 0 Capex to Debt (%) 35.2 69.5 44.1 49.6 Net Financing CF (18) 73 (38) (38) Z-Score (X) 5.4 4.7 4.6 4.5 Currency Adjustments 0 0 0 0 N. Cash/(Debt)PS (sen) 26.5 35.0 41.4 52.0 Chg in Cash 12 224 25 48

Opg CFPS (sen) 23.0 20.6 22.5 23.3 Free CFPS (sen) 7.2 3.0 11.4 15.5 Quarterly / Interim Income Statement (RM m) Segmental Breakdown / Key Assumptions FY Dec 2Q2010 3Q2010 4Q2010 1Q2011 FY Dec 2010A 2011F 2012F 2013F

Turnover 56 72 83 83 Revenues (RM m) Cost of Goods Sold (25) (34) (45) (50) Offshore TMS 238 351 450 494 Gross Profit 31 39 38 33 Marine Charter 67 23 23 6 Other Oper. (Exp)/Inc (11) (12) (14) (12) Equipment Rental 4 4 4 5 Operating Profit 20 26 23 21 Others (55) 0 0 0 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 0 2 0 0 Total 255 379 478 504 Net Interest (Exp)/Inc (1) (2) (2) (1) EBIT (RM m) Exceptional Gain/(Loss) 0 0 0 2 Offshore TMS 55 97 116 122 Pre-tax Profit 18 26 22 22 Marine Charter 29 10 10 2 Tax (4) (4) (4) (6) Equipment Rental 1 2 2 2 Minority Interest 0 0 0 0 Others (1) 0 0 0 Net Profit 14 23 18 17 Net profit bef Except. 14 23 18 14 Total 83 108 127 126 EBITDA 20 28 24 21 EBIT Margins (%) Offshore TMS 22.9 27.5 25.7 24.7 Sales Gth (%) 31.2 28.2 14.8 0.3 Marine Charter 42.3 42.3 42.3 42.3 EBITDA Gth (%) 11.7 41.8 (14.7) (10.0) Equipment Rental 21.7 44.0 44.0 44.0 Opg Profit Gth (%) 28.2 30.8 (10.6) (8.2) Others 1.4 N/A N/A N/A Net Profit Gth (%) 10.6 57.0 (20.8) (7.2) Gross Margins (%) 55.0 53.3 45.4 40.2 Total 32.6 28.6 26.7 25.1 Opg Profit Margins (%) 35.4 36.1 28.1 25.8 Key Assumptions Net Profit Margins (%) 25.5 31.2 21.6 20.0 Order book win (RM'm) 600.0 1,000.0 600.0 400.0 Offshore TMS EBIT % 22.9 27.5 25.7 24.7 Marine Charter EBIT % 42.3 42.3 42.3 42.3 Source: Company, DBS Vickers

Sector Focus

Malaysia Marine & Heavy Eng

HWANGDBS

Bloomberg: MMHE MK | Reuters: MHEB.KL

FULLY VALUED RM5.72 KLCI : 1,513.54 Price Target : 12-Month RM 5.00 DBSV vs Consensus: FY11F- 12F earnings below consensus Analyst QUAH He Wei +603 2711 2222 [email protected]

Price Relative

3.4

4.4

5.4

6.4

7.4

8.4

9.4

Oct-10 Mar-11 Aug-11

RM

89

109

129

149

169

189

209

229

Relative Index

Malaysia Marine & Heavy Eng (LHS) Relative KLCI INDEX (RHS)

Forecasts and Valuation FY Dec (RM m) 2010A 9M11F 2012F 2013F

Turnover 4,435 2,434 4,299 4,743 EBITDA 452 249 391 489 Pre-tax Profit 424 264 387 468 Net Profit 451 267 365 442 Net Pft (Pre Ex.) 451 267 365 442 EPS (sen) 28.2 16.7 22.8 27.6 EPS Pre Ex. (sen) 28.2 16.7 22.8 27.6 EPS Gth (%) 61 (41) 37 21 EPS Gth Pre Ex (%) 62 (41) 37 21 Diluted EPS (sen) 28.2 16.7 22.8 27.6 Net DPS (sen) 5.0 3.0 4.1 4.9 BV Per Share (sen) 143.6 155.3 175.2 198.8 PE (X) 20.3 34.3 25.1 20.7 PE Pre Ex. (X) 20.3 34.3 25.1 20.7 P/Cash Flow (X) nm 46.3 30.7 21.2 EV/EBITDA (X) 17.1 32.7 22.8 18.4 Net Div Yield (%) 0.9 0.5 0.7 0.9 P/Book Value (X) 4.0 3.7 3.3 2.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 25.8 11.2 13.8 14.8 Earnings Rev (%): 0.0 0.0 0.0 Consensus EPS (sen): 29.0 26.8 31.4 Other Broker Recs: B: 3 S: 12 H: 4 ICB Industry : Oil & Gas ICB Sector: Oil Equipment; Services & Dist Principal Business: Heavy engineering and marine services provider


At A Glance Issued Capital (m shrs) 1,600 Mkt. Cap (RMm/US$m) 9,152 / 2,888 Major Shareholders MISC (%) 66.5 Technip (%) 8.1 Free Float (%) 25.4 Avg. Daily Vol.(‘000) 1,263

Faltering hope • Might lose Malikai fabrication contract

• Plagued by slow order book replenishment

• Maintain Fully Valued and RM5.00 TP No longer a monopoly. Shell has formally invited international yards to participate in a re-tender for the tension leg platform fabrication job at Malikai deepwater field, offshore Sabah. This is the first time in recent years that foreign firms were invited to bid for deepwater fabrication contracts in Malaysia, which had been monopolised by Petronas’ deepwater fabrication arm, MMHE, in the past. The tension leg platform contract may be worth about RM1bn, and requires a 11,000 MT topside to be installed on a 12,000 MT hull. Potential bidders include McDermott and Keppel FELS, Intecsea and China Offshore, and Modec. The first tender hit a snag when submitted bids were double Shell’s estimated cost. We expect the contract to be awarded by 2H12 as the bids are only due in Apr12.

Weak earnings visibility. This latest development reaffirms our concern over MMHE’s weak earnings visibility. Its outstanding order book stands at RM3.7bn, and there is unlikely to be any major replenishment at least until after 1H12. If there is no major replenishment in the next 12 months, its order book could drop below RM800m by end 2012. Additionally, its estimated RM2.8bn YTD contract wins may not be able to sustain its c.RM4bn annual burn rate.

Maintain Fully Valued and RM5.00 TP, pegged to 22x FY12 EPS. Current valuation is expensive at 25x FY12 PE and 3.3x PBV against regional peers’ 9x and 1.6x, respectively.

Sector Focus

Malaysia Marine & Heavy Eng

HWANGDBS


Turnover 4,435 2,434 4,299 4,743 Net Fixed Assets 1,030 1,556 2,546 2,993 Cost of Goods Sold (4,093) (2,147) (3,767) (4,149) Invts in Associates & JVs 35 77 77 128 Gross Profit 343 287 531 595 Other LT Assets 77 77 77 77 Other Opng (Exp)/Inc 57 (93) (165) (182) Cash & ST Invts 1,448 1,027 264 157 Operating Profit 400 194 367 413 Inventory 31 16 28 31 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 2,304 1,264 2,233 2,464 Associates & JV Inc 25 42 1 51 Other Current Assets 2 10 10 10 Net Interest (Exp)/Inc (1) 28 20 5 Total Assets 4,927 4,027 5,235 5,860 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 424 264 387 468 ST Debt 0 0 0 0 Tax 26 8 (15) (19) Other Current Liab 2,625 1,533 2,417 2,657 Minority Interest 0 (5) (6) (8) LT Debt 0 0 0 0 Preference Dividend 0 0 0 0 Other LT Liabilities 1 1 1 1 Net Profit 451 267 365 442 Shareholder’s Equity 2,298 2,485 2,803 3,180 Net Profit before Except. 451 267 365 442 Minority Interests 3 8 14 22 EBITDA 452 249 391 489 Total Cap. & Liab. 4,927 4,027 5,235 5,860 Sales Gth (%) (27.8) (45.1) 76.6 10.3 Non-Cash Wkg. Capital (288) (242) (145) (152) EBITDA Gth (%) 13.9 (44.9) 56.9 25.2 Net Cash/(Debt) 1,448 1,027 264 157 Opg Profit Gth (%) 8.0 (51.5) 89.2 12.6 Net Profit Gth (%) 61.4 (40.7) 36.7 21.0 Effective Tax Rate (%) N/A N/A 4.0 4.0 Cash Flow Statement (RM m) Rates & Ratio FY Dec 2010A 2011F 2012F 2013F FY Dec 2010A 2011F 2012F 2013F

Pre-Tax Profit 424 264 387 468 Gross Margins (%) 7.7 11.8 12.4 12.5 Dep. & Amort. 27 13 23 26 Opg Profit Margin (%) 9.0 8.0 8.5 8.7 Tax Paid 0 (28) 0 (15) Net Profit Margin (%) 10.2 11.0 8.5 9.3 Assoc. & JV Inc/(loss) (25) (42) (1) (51) ROAE (%) 25.8 11.2 13.8 14.8 Chg in Wkg.Cap. 0 (9) (112) 3 ROA (%) 9.3 6.0 7.9 8.0 Other Operating CF (475) 0 0 0 ROCE (%) 20.8 8.1 13.2 13.2 Net Operating CF (49) 198 298 431 Div Payout Ratio (%) 17.7 17.7 17.7 17.7 Capital Exp.(net) (115) (539) (1,014) (473) Net Interest Cover (x) 519.6 NM NM NM Other Invts.(net) 0 0 0 0 Asset Turnover (x) 0.9 0.5 0.9 0.9 Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 217.4 267.5 148.5 180.7 Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 254.7 342.7 185.8 217.6 Other Investing CF 0 0 0 0 Inventory Turn (avg days) 3.1 4.0 2.2 2.6 Net Investing CF (115) (539) (1,014) (473) Current Ratio (x) 1.4 1.5 1.0 1.0 Div Paid 0 (80) (47) (65) Quick Ratio (x) 1.4 1.5 1.0 1.0 Chg in Gross Debt 48 0 0 0 Net Debt/Equity (X) CASH CASH CASH CASH Capital Issues 0 0 0 0 Net Debt/Equity ex MI (X) (0.6) (0.4) (0.1) 0.0 Other Financing CF 798 0 0 0 Capex to Debt (%) N/A N/A N/A N/A Net Financing CF 846 (80) (47) (65) Z-Score (X) 5.5 4.9 3.7 3.5 Currency Adjustments 0 0 0 0 N. Cash/(Debt)PS (sen) 90.5 64.2 16.5 9.8 Chg in Cash 682 (421) (763) (107) Opg CFPS (sen) (3.1) 12.9 25.6 26.8

Free CFPS (sen) (10.3) (21.3) (44.7) (2.6) Quarterly / Interim Income Statement (RM m) Segmental Breakdown / Key Assumptions FY Dec 3Q2011 4Q2011 1Q2012 2Q2012 FY Dec 2010A 2011F 2012F 2013F

Turnover 1,316 923 958 463 Revenues (RM m) Cost of Goods Sold (1,215) (852) (899) (398) E&C 4,157 2,061 3,270 4,000 Gross Profit 101 71 59 65 MRC 338 372 1,027 741 Other Oper. (Exp)/Inc 11 19 7 20 Others (59) 2 2 2 Operating Profit 112 91 66 85 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 1 24 30 15 Total 4,435 2,434 4,299 4,743 Net Interest (Exp)/Inc 0 0 0 0 EBIT (RM m) Exceptional Gain/(Loss) 0 0 0 0 E&C 316 157 248 320 Pre-tax Profit 113 114 96 100 MRC 49 37 118 93 Tax 20 14 (17) (20) Others 35 0 0 0 Minority Interest 0 0 0 0 Net Profit 134 129 79 80 Net profit bef Except. 134 129 79 80 Total 400 194 367 413 EBITDA 113 114 96 100 EBIT Margins (%) E&C 7.6 7.6 7.6 8.0 Sales Gth (%) 28.7 (29.9) 3.7 (51.7) MRC 14.4 10.0 11.5 12.5 EBITDA Gth (%) 11.6 0.7 (15.5) 4.1 Others (58.9) 0.0 0.0 0.0 Opg Profit Gth (%) 11.2 (19.5) (26.8) 28.3 Net Profit Gth (%) 72.6 (4.1) (38.6) 1.5 Gross Margins (%) 7.7 7.7 6.1 14.1 Total 9.0 8.0 8.5 8.7 Opg Profit Margins (%) 8.5 9.8 6.9 18.3 Key Assumptions Net Profit Margins (%) 10.2 13.9 8.3 17.3 new order recognition 0.0 1,000.0 3,000.0 5,000.0 E&C EBIT margin (%) 7.6 7.6 7.6 8.0 MRC EBIT margin (%) 14.4 10.0 11.5 12.5 Source: Company, DBS Vickers

Sector Focus

Petronas Chemicals

HWANGDBS

Bloomberg: PCHEM MK | Reuters: N/A

FULLY VALUED RM6.19 KLCI : 1,513.54 Price Target : 12-Month RM 5.50 (Prev RM 5.50) DBSV vs Consensus: FY11 and FY12 earnings below consensus, contrarian call Analyst QUAH He Wei +603 2711 2222 [email protected]

Price Relative

4.7

5.2

5.7

6.2

6.7

7.2

7.7

8.2

Nov-10 Apr-11 Sep-11

RM

89

109

129

149

169

189

209

Relative Index

Petronas Chemicals (LHS) Relative KLCI INDEX (RHS)


Turnover 14,586 11,668 15,645 15,539 EBITDA 5,576 4,674 6,166 5,881 Pre-tax Profit 4,260 3,836 4,815 4,539 Net Profit 2,994 2,700 3,390 3,196 Net Pft (Pre Ex.) 2,994 2,700 3,390 3,196 EPS (sen) 37.4 33.8 42.4 39.9 EPS Pre Ex. (sen) 37.4 33.8 42.4 39.9 EPS Gth (%) 36 (10) 26 (6) EPS Gth Pre Ex (%) 36 (10) 26 (6) Diluted EPS (sen) 37.4 33.8 42.4 39.9 Net DPS (sen) 19.0 16.9 21.2 20.0 BV Per Share (sen) 245.6 260.3 285.8 304.6 PE (X) 16.5 18.3 14.6 15.5 PE Pre Ex. (X) 16.5 18.3 14.6 15.5 P/Cash Flow (X) 33.6 10.0 9.0 12.0 EV/EBITDA (X) 8.2 9.3 6.6 6.8 Net Div Yield (%) 3.1 2.7 3.4 3.2 P/Book Value (X) 2.5 2.4 2.2 2.0 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 16.3 13.3 15.5 13.5 Earnings Rev (%): - - - Consensus EPS (sen): 45.5 51.5 57.0 Other Broker Recs: B: 12 S: 4 H: 2 ICB Industry : Basic Materials ICB Sector: Chemicals Principal Business: Leading integrated petrochemical producer in Malaysia with total combined production capacity of over 11m MT p.a. Its two main divisions a Source of all data: Company, DBS Vickers, Bloomberg

At A Glance Issued Capital (m shrs) 8,000 Mkt. Cap (RMm/US$m) 49,520 / 15,626 Major Shareholders Petronas (%) 64.4 EPF (%) 12.9 Free Float (%) 22.7 Avg. Daily Vol.(‘000) 6,106

Slowing demand • Weak petrochemicals demand will crimp earnings

• Sluggish selling prices despite high oil prices

• Maintain Fully Valued and RM5.50 TP Demand still weak. Prices of most petrochemicals are still falling, implying weaker demand going into 2012. 4Q11 petrochemicals’ ASP has fallen by 5-20% QoQ possibly due to rising supply in the Middle East and de-stocking in China. PCG’s 3QFY11 (Oct-Dec11) earnings may also have been dragged down by the on-going gas curtailment issue. In addition, utilisation at its Kertih plant might be affected by the week-long major maintenance at Guntong platform (offshore Terengganu) at end-11 for tie-in works. Flat production until FY14. PCG will not be adding substantial capacity for the next three years. This means its earnings would be driven by the volatile oil prices, despite its low-priced feedstock. Several mega expansion plans are currently under feasibility study, but they are only scheduled for completion in FY14 at the earliest. Maintain Fully Valued. We remain bearish on PCG premised on a weaker economic outlook for 2012, or at least for 1H12. PCG is among the most expensive petrochemical stocks in the region at 15x FY12 PE and 2.2x PBV, compared to peers’ average of 8x PE and 1.4x PBV. PTT Global Chemical is much cheaper at 8x PE and 1.4x PBV despite being the largest gas-based producer in the region after PCG.

Sector Focus

Petronas Chemicals

HWANGDBS


Turnover 14,586 11,668 15,645 15,539 Net Fixed Assets 12,706 12,864 12,799 12,789 Cost of Goods Sold (10,267) (7,568) (10,740) (10,967) Invts in Associates & JVs 945 1,305 1,876 2,505 Gross Profit 4,319 4,100 4,905 4,572 Other LT Assets 2,767 2,668 2,536 2,404 Other Opng (Exp)/Inc (665) (477) (508) (512) Cash & ST Invts 8,914 11,765 14,807 16,098 Operating Profit 3,654 3,623 4,397 4,061 Inventory 1,173 938 1,258 1,250 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 2,296 1,837 2,463 2,446 Associates & JV Inc 714 360 571 628 Other Current Assets 124 124 124 124 Net Interest (Exp)/Inc (108) (148) (153) (149) Total Assets 28,925 31,501 35,863 37,614 Exceptional Gain/(Loss) 0 0 0 0 Pre-tax Profit 4,260 3,836 4,815 4,539 ST Debt 407 307 207 107 Tax (798) (767) (963) (908) Other Current Liab 2,519 3,398 5,358 5,273 Minority Interest (468) (368) (462) (436) LT Debt 3,282 3,530 3,530 3,530 Preference Dividend 0 0 0 0 Other LT Liabilities 1,661 1,661 1,661 1,661 Net Profit 2,994 2,700 3,390 3,196 Shareholder’s Equity 19,647 20,827 22,867 24,368 Net Profit before Except. 2,994 2,700 3,390 3,196 Minority Interests 1,409 1,777 2,239 2,675 EBITDA 5,576 4,674 6,166 5,881 Total Cap. & Liab. 28,925 31,501 35,863 37,614 Sales Gth (%) 19.5 (20.0) 34.1 (0.7) Non-Cash Wkg. Capital 1,074 (499) (1,513) (1,454) EBITDA Gth (%) 28.9 (16.2) 31.9 (4.6) Net Cash/(Debt) 5,225 7,928 11,070 12,461 Opg Profit Gth (%) 12.5 (0.8) 21.4 (7.7) Net Profit Gth (%) 36.2 (9.8) 25.5 (5.7) Effective Tax Rate (%) 18.7 20.0 20.0 20.0 Cash Flow Statement (RM m) Rates & Ratio FY Dec 2011A 2012F 2013F 2014F FY Dec 2011A 2012F 2013F 2014F

Pre-Tax Profit 4,260 3,836 4,815 4,539 Gross Margins (%) 29.6 35.1 31.4 29.4 Dep. & Amort. 1,208 691 1,197 1,192 Opg Profit Margin (%) 25.1 31.1 28.1 26.1 Tax Paid (672) (204) (767) (963) Net Profit Margin (%) 20.5 23.1 21.7 20.6 Assoc. & JV Inc/(loss) (714) (360) (571) (628) ROAE (%) 16.3 13.3 15.5 13.5 Chg in Wkg.Cap. (2,332) 1,010 819 (5) ROA (%) 10.7 8.9 10.1 8.7 Other Operating CF (277) 0 0 0 ROCE (%) 12.2 10.6 12.0 10.3 Net Operating CF 1,473 4,973 5,493 4,135 Div Payout Ratio (%) 50.8 50.0 50.0 50.0 Capital Exp.(net) (500) (750) (1,000) (1,050) Net Interest Cover (x) 33.8 24.6 28.7 27.2 Other Invts.(net) (911) 0 0 0 Asset Turnover (x) 0.5 0.4 0.5 0.4 Invts in Assoc. & JV 283 0 0 0 Debtors Turn (avg days) 56.7 64.6 50.2 57.7 Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 142.0 131.3 134.4 163.6 Other Investing CF (101) 0 0 0 Inventory Turn (avg days) 48.4 56.0 42.0 46.8 Net Investing CF (1,229) (750) (1,000) (1,050) Current Ratio (x) 4.3 4.0 3.4 3.7 Div Paid (3,277) (1,520) (1,350) (1,695) Quick Ratio (x) 3.8 3.7 3.1 3.4 Chg in Gross Debt 967 148 (100) (100) Net Debt/Equity (X) CASH CASH CASH CASH Capital Issues 3,500 0 0 0 Net Debt/Equity ex MI (X) (0.3) (0.4) (0.5) (0.5) Other Financing CF (47) 0 0 0 Capex to Debt (%) 13.6 19.5 26.8 28.9 Net Financing CF 1,143 (1,372) (1,450) (1,795) Z-Score (X) 6.4 5.0 4.6 4.0 Currency Adjustments (15) 0 0 0 N. Cash/(Debt)PS (sen) 65.3 99.1 138.4 155.8 Chg in Cash 1,372 2,851 3,043 1,291 Opg CFPS (sen) 47.6 49.5 58.4 51.8

Free CFPS (sen) 12.2 52.8 56.2 38.6 Quarterly / Interim Income Statement (RM m) Segmental Breakdown / Key Assumptions FY Dec 3Q2011 4Q2011 1Q2012 2Q2012 FY Dec 2011A 2012F 2013F 2014F

Turnover 3,898 4,353 3,345 4,638 Revenues (RM m) Cost of Goods Sold (2,688) (2,963) (2,166) (2,794) Olefins & derivatives 11,217 8,610 11,430 11,582 Gross Profit 1,210 1,390 1,179 1,844 fertilisers & methanol 3,314 3,014 4,157 3,896 Other Oper. (Exp)/Inc (164) (223) (198) (215) Others 55 43 58 61 Operating Profit 1,046 1,167 981 1,629 Other Non Opg (Exp)/Inc 0 0 0 0 Associates & JV Inc 264 164 115 104 Total 14,586 11,668 15,645 15,539 Net Interest (Exp)/Inc (35) (33) (38) (33) Key Assumptions Exceptional Gain/(Loss) 0 0 0 0 Olefins & derivaties sold (m 3.3 3.4 3.4 3.4 Pre-tax Profit 1,275 1,298 1,058 1,700 Fertilizers & methanol sold 3.4 3.8 3.8 3.8 Tax (276) (138) (244) (428) Ethylene price (US$/MT) 955.4 1,000.0 1,050.0 1,100.0 Minority Interest (125) (228) (77) (123) Paraxylene price (US$/MT) 1,035.0 1,400.0 1,450.0 1,500.0 Net Profit 874 932 737 1,149 Urea price (US$/MT) 318.5 430.0 451.5 474.1 Net profit bef Except. 874 932 737 1,149 EBITDA 1,310 1,331 1,427 2,064 Sales Gth (%) 23.0 11.7 (23.2) 38.7 EBITDA Gth (%) 79.9 1.6 7.2 44.6 Opg Profit Gth (%) 82.9 11.6 (15.9) 66.1 Net Profit Gth (%) 73.8 6.6 (20.9) 55.9 Gross Margins (%) 31.0 31.9 35.2 39.8 Opg Profit Margins (%) 26.8 26.8 29.3 35.1 Net Profit Margins (%) 22.4 21.4 22.0 24.8 Source: Company, DBS Vickers

Sector Focus

Wah Seong Corp

HWANGDBS

Bloomberg: WSC MK | Reuters: WAHE.KL

BUY RM2.05 KLCI : 1,513.54 Price Target : 12-Month RM 2.50 Potential Catalyst: Large pipe-coating contracts DBSV vs Consensus: FY12F-13F earnings below consensus Analyst QUAH He Wei +603 2711 2222 [email protected]

Price Relative

0.7

1.2

1.7

2.2

2.7

3.2

2007 2008 2009 2010 2011

RM

23

43

63

83

103

123

143

163

183

203

Relative Index

Wah Seong Corp (LHS) Relative KLCI INDEX (RHS)


Turnover 1,523 1,759 1,878 2,019 EBITDA 153 256 277 299 Pre-tax Profit 86 177 196 216 Net Profit 56 114 126 138 Net Pft (Pre Ex.) 54 114 126 138 EPS (sen) 7.3 14.9 16.5 18.1 EPS Pre Ex. (sen) 7.1 14.9 16.5 18.1 EPS Gth (%) (54) 103 11 10 EPS Gth Pre Ex (%) (56) 111 11 10 Diluted EPS (sen) 7.3 14.9 16.5 18.1 Net DPS (sen) 4.3 4.5 4.9 5.4 BV Per Share (sen) 121.5 132.0 144.0 157.2 PE (X) 27.9 13.7 12.4 11.3 PE Pre Ex. (X) 29.0 13.7 12.4 11.3 P/Cash Flow (X) 39.4 10.2 9.4 8.9 EV/EBITDA (X) 12.6 7.1 6.3 5.7 Net Div Yield (%) 2.1 2.2 2.4 2.7 P/Book Value (X) 1.7 1.6 1.4 1.3 Net Debt/Equity (X) 0.3 0.1 0.0 CASH ROAE (%) 6.2 11.8 11.9 12.0 Earnings Rev (%): 0.0 0.0 0.0 Consensus EPS (sen): 15.9 18.8 19.4 Other Broker Recs: B: 10 S: 0 H: 1 ICB Industry : Oil & Gas ICB Sector: Oil Equipment; Services & Dist Principal Business: Specialized in pipe manufacturing, pipe coating and industrial engineering services for O&G sector


At A Glance Issued Capital (m shrs) 754 Mkt. Cap (RMm/US$m) 1,545 / 487 Major Shareholders Wah Seong Trading (%) 33.2 Midvest Asia Sdn Bhd (%) 5.1 EPF (%) 5.0 Free Float (%) 56.7 Avg. Daily Vol.(‘000) 309

Virtual monopoly in Malaysia • Prime beneficiary of Petronas’ initiative to replace

ageing piping facilities

• North Malay Basin project a rerating catalyst

• Maintain Buy and RM2.50 TP

Likely to bag jobs in Malaysia. We are confident Wah Seong will bag the bulk of pipe-coating jobs in Malaysia next year given that its competitor Bredero Shaw’s pipe-coating plants are likely to be fully utilised for Wheatstone and Ichthys projects in Australia. This would create a monopoly for Wah Seong to expand its market share in Malaysia as we believe that it will be preferred by Petronas and other oil players to ensure timely delivery, especially when oil prices remain high. RM1.2bn order book. This will sustain earnings at least until 1H12. We understand it has been securing small ad-hoc projects (RM10-20m each) from Petronas under the umbrella contract, and these normally take less than 3 months to complete. Petronas’ effort to fast-track gas field exploration to solve the gas curtailment issue in Malaysia could also lead to more contracts for Wah Seong. Maintain Buy. We remain optimistic Wah Seong will secure more pipe-coating jobs in Malaysia given its outstanding track record and niche expertise in this area. We reiterate our Buy call and RM2.50 TP, which is pegged to 15x FY12 EPS and implies 22% potential upside.

Sector Focus

Wah Seong Corp

HWANGDBS


Turnover 1,523 1,759 1,878 2,019 Net Fixed Assets 541 497 485 480 Cost of Goods Sold (1,247) (1,419) (1,498) (1,631) Invts in Associates & JVs 45 35 35 36 Gross Profit 276 340 380 388 Other LT Assets 262 262 262 262 Other Opng (Exp)/Inc (163) (135) (156) (145) Cash & ST Invts 365 491 583 670 Operating Profit 114 205 223 243 Inventory 243 281 300 322 Other Non Opg (Exp)/Inc 0 0 0 0 Debtors 527 609 650 698 Associates & JV Inc (6) 0 1 1 Other Current Assets 26 14 14 14 Net Interest (Exp)/Inc (24) (28) (28) (28) Total Assets 2,010 2,189 2,329 2,484 Exceptional Gain/(Loss) 2 0 0 0 Pre-tax Profit 86 177 196 216 ST Debt 192 192 192 192 Tax (21) (44) (49) (54) Other Current Liab 309 387 414 445 Minority Interest (9) (20) (22) (24) LT Debt 428 430 430 430 Preference Dividend 0 0 0 0 Other LT Liabilities 40 40 40 40 Net Profit 56 114 126 138 Shareholder’s Equity 925 1,005 1,097 1,197 Net Profit before Except. 54 114 126 138 Minority Interests 115 135 156 180 EBITDA 153 256 277 299 Total Cap. & Liab. 2,010 2,189 2,329 2,484 Sales Gth (%) (21.9) 15.5 6.8 7.5 Non-Cash Wkg. Capital 487 516 550 590 EBITDA Gth (%) (55.0) 67.8 8.1 7.8 Net Cash/(Debt) (255) (131) (39) 48 Opg Profit Gth (%) (59.5) 80.1 9.1 8.6 Net Profit Gth (%) (53.9) 102.9 10.5 10.0 Effective Tax Rate (%) 24.6 25.0 25.0 25.0 Cash Flow Statement (RM m) Rates & Ratio FY Dec 2010A 2011F 2012F 2013F FY Dec 2010A 2011F 2012F 2013F

Pre-Tax Profit 86 177 196 216 Gross Margins (%) 18.1 19.3 20.2 19.2 Dep. & Amort. 45 51 53 55 Opg Profit Margin (%) 7.5 11.6 11.9 12.0 Tax Paid (24) (9) (44) (49) Net Profit Margin (%) 3.7 6.5 6.7 6.8 Assoc. & JV Inc/(loss) 6 0 (1) (1) ROAE (%) 6.2 11.8 11.9 12.0 Chg in Wkg.Cap. (65) (65) (38) (45) ROA (%) 2.7 5.4 5.6 5.7 Other Operating CF (8) 0 0 0 ROCE (%) 4.9 8.8 9.0 9.2 Net Operating CF 40 154 166 175 Div Payout Ratio (%) 58.8 30.0 30.0 30.0 Capital Exp.(net) (25) (30) (40) (50) Net Interest Cover (x) 4.7 7.3 8.0 8.7 Other Invts.(net) (11) 23 0 0 Asset Turnover (x) 0.7 0.8 0.8 0.8 Invts in Assoc. & JV (3) 11 0 0 Debtors Turn (avg days) 125.0 117.8 122.3 121.9 Div from Assoc & JV 1 0 0 0 Creditors Turn (avg days) 95.0 80.2 84.2 82.7 Other Investing CF 0 0 0 0 Inventory Turn (avg days) 81.0 69.9 73.3 72.0 Net Investing CF (37) 4 (40) (50) Current Ratio (x) 2.3 2.4 2.6 2.7 Div Paid (50) (33) (34) (38) Quick Ratio (x) 1.8 1.9 2.0 2.2 Chg in Gross Debt (41) 2 0 0 Net Debt/Equity (X) 0.3 0.1 0.0 CASH Capital Issues 0 0 0 0 Net Debt/Equity ex MI (X) 0.3 0.1 0.0 0.0 Other Financing CF (2) 0 0 0 Capex to Debt (%) 4.1 4.8 6.4 8.0 Net Financing CF (93) (32) (34) (38) Z-Score (X) 2.5 2.7 2.7 2.7 Currency Adjustments (16) 0 0 0 N. Cash/(Debt)PS (sen) (33.4) (17.1) (5.1) 6.3 Chg in Cash (106) 126 92 87

Opg CFPS (sen) 13.7 28.7 26.8 28.9 Free CFPS (sen) 1.9 16.3 16.5 16.4 Quarterly / Interim Income Statement (RM m) Segmental Breakdown / Key Assumptions FY Dec 4Q2010 1Q2011 2Q2011 3Q2011 FY Dec 2010A 2011F 2012F 2013F

Turnover 397 491 405 479 Revenues (RM m) Cost of Goods Sold (325) (383) (331) (377) Pipe coating 332 442 447 490 Gross Profit 72 107 75 102 Trading 471 471 495 520 Other Oper. (Exp)/Inc (31) (34) (33) (50) Engineering 213 255 281 309 Operating Profit 41 74 42 52 Renewable energy 185 212 276 317 Other Non Opg (Exp)/Inc 0 0 0 0 Others 323 378 379 383 Associates & JV Inc (2) 0 0 1 Total 1,523 1,759 1,878 2,019 Net Interest (Exp)/Inc (5) (5) (6) (6) Pretax profit (RM m) Exceptional Gain/(Loss) 2 0 (1) (11) Pipe coating 73 102 105 115 Pre-tax Profit 35 69 34 37 Trading 12 13 15 16 Tax (8) (17) (5) (7) Engineering (19) 5 7 8 Minority Interest (3) (8) (3) (8) Renewable energy 32 38 50 57 Net Profit 25 43 26 21 Others (12) 19 20 20 Net profit bef Except. 23 43 28 32 Total 86 177 196 216 EBITDA 39 74 41 53 Pretax profit Margins (%) Pipe coating 22.1 23.0 23.5 23.5 Sales Gth (%) 14.6 23.6 (17.5) 18.2 Trading 2.6 2.8 3.0 3.0 EBITDA Gth (%) 56.2 90.7 (44.0) 28.9 Engineering (9.1) 2.0 2.5 2.5 Opg Profit Gth (%) 55.0 82.2 (43.6) 25.3 Renewable energy 17.1 18.0 18.0 18.0 Net Profit Gth (%) 98.3 75.1 (39.6) (18.7) Others (3.6) 5.1 5.2 5.3 Gross Margins (%) 18.1 21.9 18.4 21.3 Total 5.7 10.1 10.4 10.7 Opg Profit Margins (%) 10.2 15.0 10.3 10.9 Key Assumptions Net Profit Margins (%) 6.2 8.8 6.5 4.4 Pipe coating contract win N/A 225.0 450.0 300.0 Source: Company, DBS Vickers

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Malaysia Oil & Gas

HWANGDBS

This document is published by HWANGDBS Vickers Research Sdn Bhd (“HDBSVR”), a subsidiary of HWANGDBS Investment Bank Berhad (“HDBS”) and an associate of DBS Vickers Securities Holdings Pte Ltd (“DBSVH”). The researchis based on information obtained from sources believed to be reliable, but we do not make any representation orwarranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. Thisdocument is prepared for general circulation. Any recommendation contained in this document does not have regard tothe specific investment objectives, financial situation and the particular needs of any specific addressee. This document isfor the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees,who should obtain separate legal or financial advice. HDBSVR accepts no liability whatsoever for any direct orconsequential loss arising from any use of this document or further communication given in relation to this document.This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBS VickersSecurities Holdings Pte Ltd is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/orpersons associated with any of them may from time to time have interests in the securities mentioned in this document. HDBSVR, HDBS, DBSVH, DBS Bank Ltd, and their associates, their directors, and/or employees may have positions in, andmay effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other banking services for these companies. HDBSVR, HDBS, DBSVH, DBS Bank Ltdand/or other affiliates of DBS Vickers Securities (USA) Inc (“DBSVUSA”), a U.S.-registered broker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the subject company mentioned in this document.HDBSVR, HDBS, DBSVH, DBS Bank Ltd and/or other affiliates of DBSVUSA may, within the past 12 months, have receivedcompensation and/or within the next 3 months seek to obtain compensation for investment banking services from thesubject company. DBSVUSA does not have its own investment banking or research department, nor has it participated inany investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing toobtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in anysecurity discussed in this document should contact DBSVUSA exclusively. DBS Vickers Securities (UK) Ltd is an authorisedperson in the meaning of the Financial Services and Markets Act and is regulated by The Financial Services Authority.Research distributed in the UK is intended only for institutional clients.

Wong Ming Tek, Head of Research

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