Oil and Gas - Valuation and recommendation

Two clear favourites. After meeting 96 fund managers from 39 fund management companies in Malaysia and Singapore, we can safely say that SapuraCrest and Kencana rank high on the fund managers’ list of preferred oil & gas stocks. The growing order books and exciting corporate manoeuvres (new markets, new businesses and new assets) have made the companies the oil & gas favourites of the investment community. The fund managers are also encouraged by both companies’ managements making good on their promises. Kencana’s management mentioned its aspiration to be a rig builder the first time we met them in 2006 while the management of SapuraCrest shared its ambition of owning pipelay barges in as early as 2004.

OVERWEIGHT reaffirmed. The sector’s valuations remain attractive, with P/E valuations of 11-14x against the robust 3-year EPS CAGR of 19%. We continue to rate Kencana, Petra Perdana, SapuraCrest and Wah Seong as Outperforms. We expect these companies to benefit from the big contracts which will be dished out from 2H10 onwards. Dialog and Petronas Dagangan remain Underperforms though their defensive qualities appeal to investors with longer-term horizons. All our forecasts, target prices and stock recommendations are unchanged. We remain OVERWEIGHT on the sector, with SapuraCrest as our top pick.