PP 7767/09/2010(025354)

10 June 2010

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
10 June 2010
MARKET DATELINE

Recom : Neutral
Oil And Gas (Downgraded)

Taking A More Cautious View

Table 1 : Oil And Gas Sector Valuations

Fair EPS EPS growth PER P/NTA P/CF GDY
Price
FYE value (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Dialog Jun 1.05 1.23 6.4 9.3 -3.4 45.4 16.5 11.3 4.1 14.3 3.3 OP
EPIC Dec 1.62 2.72 26.9 27.2 7.9 1.1 6.0 6.0 0.8 4.2 5.8 OP
Kencana July 1.39 1.52 10.2 11.7 42.9 15.0 13.6 11.8 2.7 10.1 0.5 MP
SapuraCrest^ Jan 2.05 2.38 16.6 18.3 35.7 10.3 12.3 11.2 1.9 5.3 3.4 MP
Wah Seong Dec 2.20 2.38 16.1 18.3 23.1 14.0 13.7 12.0 2.8 4.7 2.9 MP
P Gas^ Mar 9.83 10.71 62.6 64.4 31.6 2.9 15.7 15.3 3.0 10.6 6.8 MP
KNM Dec 0.50 0.49 2.9 4.9 -24.1 69.7 17.5 10.3 8.0 13.4 4.0 UP
Petra Perdana Dec 1.19 1.15 6.8 12.2 -31.1 79.9 17.6 9.8 0.7 1.3 1.3 UP
Sector Avg 24.5 13.9 14.2 12.5
Sector Avg (excl Pet Gas) 22.2 28.7 12.3 9.6
^ FY10-11 valuations refer to those of FY11-12

♦ Oil price assumptions. The US EIA in its most recent Short-Term Energy Table 2. Basis For Fair Value Estimates

Outlook report, has lowered its 2010 forecast for average WTI spot price to Company Valuation Basis
Dialog Target PER of 15x FY11,
US$78.75/barrel from last month’s projection of US$82.18. While anticipation
premium to the sector
of stronger crude oil demand has previously helped to support oil price above benchmark due to good
US$65/barrel, we believe the near- to medium-term outlook has turned management and robust
cautious. Demand for crude oil remains relatively lacklustre, while supply balance sheet.
remains ample. Moreover, financial demand has dwindled due to credit EPIC Target FY11 PER at 10x to
factor in flatter growth and
tightening. In the absence of fundamental catalysts for crude oil prices to move
smaller market cap.
higher, we have assumed prices will continue to hover at current levels of Kencana Target FY11 PER at 13x, in
US$65-75 at least through the 2H10, before picking up slightly in 2011 to a line with the sector
range of US$75-85. In our view, longer-range projections are unreliable at this benchmark.
stage, although our expectations remain on the positive side. KNM Target FY11 PER at 10x to
factor in flatter growth and
♦ Near-term outlook clouded by BP oil spill and Australia’s RSPT. While higher earning risk.
Petra P’dana Target FY11 PER at 10x for
we are positive on Petronas’ shift back to domestic investments, instead of
marine, plus share of Petra
overseas exploration, we believe sizeable offshore contracts in Malaysia and Energy’s FV at 9x.
overseas would likely see delays in the near term given the uncertainties PetGas DCF
caused by the BP oil spill in the Gulf of Mexico as well as by Australia’s SapCrest Target FY11 PER at 13x, in
proposed Resources Super-Profit Tax. line with the sector
benchmark.
♦ Sector could see further de-rating. We thus believe the market is already Wah Seong Target FY10 PER at 13x, in
line with the sector
looking at uninspiring medium-term earnings growth for the O&G service
benchmark.
providers. Already, Singapore peers are trading average FY11 PER of 12.7x, Source: RHBRI
which compares to its high of 15.5x in mid-April 2010. In our view, there could
be further de-rating of the sector, or at best share prices will remain stuck at
current levels for the next six months.

♦ Downgraded to Neutral. Although the longer-term earnings visibility for O&G Wong Chin Wai
service providers remains intact on the back of reserve replenishment (603) 92802158
activities, we believe the focus will be on the near-term uncertainties and risk wong.chin.wai@rhb.com.my
of earnings disappointment. Therefore, while we have rolled forward our
valuation base year to FY11 (from FY10 previously), we have also pulled back
our target PERs for the oil & gas stocks under coverage. Against this backdrop Yap Huey Chiang
of uncertainty, we downgrade the sector to Neutral from overweight. (603) 92802171
yap.huey.chiang@rhb.com.my

Please read important disclosures at the end of this report.

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 10 June 2010

Crude Oil Price Outlook Has Changed

♦ Oil price assumptions. We note that the US EIA in its most recent Short-Term Energy Outlook report lowered
its 2010 forecast for average WTI spot prices to US$78.75/barrel from last month’s projection of US$82.18. In
addition, the agency also cut its outlook for global oil consumption in 2010 to 85.51m barrels per day (bpd) from
last month’s projection of 85.55m bpd, although we note this is still 1.8% higher vs. 84.01m bpd in 2009. While
the anticipation of stronger crude oil demand in tandem with global economic recovery has previously helped to
support crude oil prices above US$65/barrel, we believe the near-term outlook has turned cautious. Demand for
crude oil remains relatively lacklustre, while supply remains ample. Moreover, financial demand has dwindled
due to credit tightening. In the absence of fundamental catalysts for crude oil prices to move higher, we have
assumed prices will continue to hover at current levels of US$65-75 at least through the 2H10, before picking up
slightly in 2011 to a range of US$75-85. In our view, longer-range projections are unreliable at this stage,
although our expectations remain on the positive side.

1) Lower energy demand ahead as manufacturing growth in Asia slows. We believe energy demand
would likely decline as manufacturing growth across Asia continues to moderate. While manufacturing
activity in China, Australia, Taiwan and South Korea remained in expansionary territory, the May data
continued to show a trend of slowing monthly growth as various governments’ policy-tightening measures
coupled with weaker business confidence affected by Europe’s sovereign-debt crisis began to crimp factory
output.

2) Diesel demand from Europe has weakened substantially. Substantial deterioration in the European
economic environment in recent months stemming from the sovereign debt-cum-currency crisis has led to
more dramatic decline in diesel demand, likely reflecting their weaker economies. We highlight that the
collapse in diesel cracks reflects the demand concerns in the market, as cracks generally reflect end-use
demand. Nevertheless, the recent weakness is expected to persist, a somber view shared by RHBRI’s
economics team on Europe’s economic growth in coming months.

3) Supply remains more than ample. We understand that the glut of crude oil that has built up in offshore
tankers rose by a sharp 25% mom to 81m barrels in April as declining refinery demand for crude in Europe
and shut-down of major refineries for maintenance in Asia moved oil back offshore. Furthermore, we note
that the levels of onshore storage level in US and Canada are still brimming above historical averages
amidst rising crude oil production from non-Organisation of Petroleum Exporting Countries (non-OPEC) and
still-weak demand from the US. Note that IEA recently revised up its 2010 forecast for crude production
from non-OPEC to 52.3m bpd (vs. 52.1m bpd previously).

4) Financial demand dwindled. Crude oil futures are normally used as a financial hedge against inflation, but
in the last 4-5 years, financial demand has also tended to be driven by expectations of physical demand and
supply, and this has provided a boost to crude oil prices. However we highlight that financial demand has
fizzled out amidst the tighter credit environment as well as the lacklustre recovery in crude oil demand
growth in 2010.

Sector Outlook

♦ BP’s oil spill in the Gulf of Mexico could adversely impact deepwater E&P activities. BP’s drilling
disaster in the Gulf of Mexico has resulted in the US government imposing a 6-month moratorium on deepwater
drilling in the region. We believe this may have repercussions for deepwater E&P activities in other regions.

o More assets competition for fewer jobs. As it stands, deepwater exploration assets in the Gulf of Mexico
are in limbo, and any prolonged freeze could result in these assets competing for jobs in other regions and
thus put some downward pressure on charter rates.

o Tighter safety regulations could delay award of new contracts. Secondly, with the US currently in the
process of imposing tighter safety regulations on deepwater E&P activities, we believe tougher regulatory
rules could also be adopted in other oil producing regions, potentially causing a delay in new contracts as
safety requirements are reviewed. This is already happening in the North Sea and China. For E&P players,
this could translate to additional requirements for safety equipment as well as higher operating costs, and
imply potentially escalation in investment hurdle rates. Notwithstanding any delays in award of new
contracts, euipment and support services providers that are able to meet these requirements could
potentially benefit. These include Dialog (which supplies specialist products and services as well as advanced

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 10 June 2010

catalyst handling services downstream), Wah Seong (which fabricates and leases gas compressors) and
KNM (which fabricates high-end process equipment).

♦ Australia’s Resources Super-Profit Tax is a concern to PSCs. We understand that Australia’s onshore
mining, metals and hydrocarbon projects (i.e. coal seam gas and LNG projects) would be significantly affected
by the proposed new tax on resource-based companies. Recall that the Australia government recently proposed
a 40% Resource Super Profits Tax (RSPT) in addition to the country’s existing corporate tax rate of 30%, which
if approved will become effective from 1 July 2012. We highlight the risk of deferment and delay in contracts as
the new tax regime could adversely impact investment returns for such projects. Already, Petronas has turned
cautious on its investment in the Gladstone LNG project in Queensland and is currently reviewing the viability of
the project in view of the proposed new tax. We note that Wah Seong, Kencana and KNM have tendered for
some of the sub-contract jobs which include the Santos Gladstone LNG, Queensland Curtis LNG and Surat
Gladstone coal seam gas project.

♦ Petronas redirecting capex into domestic & proven resources. It was reported that Petronas’ new
president and CEO Datuk Shamsul Azhar announced that the company’s capex strategy will shift back to the
development of oil and gas reserves in Malaysia instead of overseas exploration. Already, ExxonMobil and
Petronas Carigali recently announced capex of around US$1-2bn for the enhanced oil recovery project in Tapis
field beginning 2013. While we are positive on this development as this will sustain a base level of activity for
the support services players, we believe sizeable contracts both in Malaysia and overseas risk being delayed or
deferred amidst the new uncertainties caused by the Gulf of Mexico disaster.

♦ Sector could see further de-rating. We thus believe the market is already looking at uninspiring medium-
term earnings growth for the O&G service providers. Already, Singapore peers are trading average FY11 PER of
12.7x, which compares to its high of 15.5x in mid-April 2010. In our view, there could be further de-rating of the
sector, or at best share prices will remain stuck at current levels for the next six months.

Table 3. Singapore Peer Comparisons

Market cap FY11 PER

Company Bloomberg ticker
(S$m) (x)
Sembcorp SMM SP 7,698 14.7
Keppel Corp KEP SP 13,540 12.4
KS Energy KST SP 468 9.4
Ezra Holdings EZRA SP 1,175 8.0
CH Offshore CHO SP 363 4.9
Swiber Holdings SWIB SP 465 5.9
Market cap weighted average 12.7
Source: Bloomberg, RHBRI

Sector Valuations

♦ Sector valuations reviewed. We have thus reviewed our valuation targets for the oil & gas stocks under
coverage. While we have maintained our sector benchmark PER at 13x, we have rolled forward our vauation
base year to FY11, from FY10 previously. We have also lowered our target PERs for individual stocks based on
their risk profiles.

1) Premium plays – Target PER lowered to 15x from 16x. We continue to believe the more consistent,
and conservatively-managed companies deserve to trade at a premium to the sector benchmark. However,
we have lowered our target PER to 15x (from 16x previously) to be in line with our target PER for the
market based on Dec 2011 earnings. Dialog remains the only player at this level due to its earnings
consistency, focus on moving up the value chain, and early interest in acquiring newer technology.

2) Growth plays – Now pegged at 13x. While we were previously quite optimistic about the middle-tier
players which appeared to be winning contracts, and had the capacity to grow significantly, the near-term
uncertainty in the industry has shifted the attention to the potential earnings risk due to high gearing and
competitive conditions in their respective sub-sectors. As a result, we have cut our target PER for this group
to 13x (from 16x), i.e. in line with the sector benchmark. These stocks include Kencana, Wah Seong and
SapuraCrest. The three companies are major players in their respective sub-sectors, and have strong
earnings growth over the next two years but we take note of potential risk to earnings if new contracts do
not materialise.

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 10 June 2010

3) Stocks with downside risk to earnings. At the bottom, we highlight the laggards which will likely
continue to be hampered by fundamental issues, such as Petra Perdana’s continuing tussle with its
associate Petra Energy, and KNM’s exposure to Europe and to higher-end market which is likely to be more
heavily affected by an uncertain crude oil price outlook. We have thus pegged both stocks at at 10x FY11
PER (vs. 13x FY10 PER previously).

4) Petronas Gas continues to be valued on a DCF basis, while we maintain our target PER for EPIC at 10x
(albeit based on FY11 EPS vs. FY10 previously).

Oil & Gas Stocks – Valuations And Recommendations

Dialog (OP, FV = RM1.23)

♦ Potential upside to earnings would be driven by stronger E&C orderbook. Dialog’s earnings growth is
primarily derived from expansion of recurrent downstream specialist services e.g. maintenance, catalyst
handling, and tankage. Nevertheless, we highlight that potential upside to FY11-12 earnings would be driven by
stronger E&C orderbook arising from expansion of TLP and EPCC jobs for both TLP T2 and Pengerang Terminal
as well as potential large and long-term catalyst handling projects with American and Europe-based clients.

♦ Still our top pick for the sector. We have trimmed our SOP fair value to RM1.23/share (from
RM1.29/previously), assuming 15x FY06/11 PER (vs. 16x FY06/11 PER previously) for the core operating
business. Nevertheless, we continue to like the company’s conservative and asset-light strategy driven by strong
management. Furthermore, we highlight that the company is one of the potential beneficiaries to stronger
demand for specialist products and services assuming stricter requirements are imposed on deepwater E&P
projects. Hence, given potential 17% upside to our new fair value, we reiterate our Outperform call on the
stock. Dialog remains our top pick for the sector.

Table 4 : Investment Statistics (DIALOG; Code: 7277) Bloomberg: DLG MK

Net EPS Net
FYE Turnover Profit EPS# Growth PER C.EPS* P/NTA P/CF Gearing ROE GDY
Jun (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (x) (%) (%)
2009 1,104.3 92.2 6.6 22.0 15.9 - 3.4 13.6 Net cash 22.7 3.5
2010f 1,114.5 126.0 6.4 (3.4) 16.5 6.0 4.1 14.3 Net cash 26.8 3.3
2011f 1,314.8 183.2 9.3 45.4 11.3 7.0 3.4 10.2 Net cash 32.6 4.8
2012f 1,490.6 223.0 11.3 21.7 9.3 8.0 2.8 8.6 Net cash 32.8 5.9
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC # Excl EI * Consensus Based On IBES Estimates

SapuraCrest (MP, FV = RM2.16)

♦ Earnings visibility remains bright. We reiterate that medium-term earnings visibility remains bright on the
back of: 1) RM9.1bn orderbook and stronger orderbook replenishment from overseas (i.e. India and Australia)
for its IPF division; 2) better cost control given ownership of its own IPF vessels as well as cost pass-through
contract; and 3) stronger growth in rates for its drilling division. However, we believe SapuraCrest will be
similarly affected by the more cautious sentiment towards the sector.

♦ Downgraded to Market Perform. Therefore, we have pulled back our target PER for the stock to 13x (from
16x previously), which results in our fair value being reduced from RM2.16/share to RM2.39, based on FY01/12
EPS (vs. FY01/11 previously). Hence, given limited upside to our new fair value, we have downgraded the stock
to Market Perform (from outperform previously).

Table 5: Investment Statistics (SAPCRES; Code: 8575) Bloomberg: SCRES MK

Net Basic Adj. FD FD EPS FD Net
FYE Turnover Profit EPS EPS Growth PER C. EPS* P/NTA P/CF gearing GDY
Jan (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (x) (%)
2010 3,257.3 170.2 13.3 12.3 46.1 16.7 - 2.2 7.9 0.6 3.4
2011f 4,829.8 231.0 16.6 16.6 35.7 12.3 15.0 1.9 5.3 0.3 3.4
2012f 5,403.1 254.8 18.3 18.3 10.3 11.2 17.0 1.6 4.7 0.1 3.4
2013f 5,533.6 264.7 19.1 19.1 3.9 10.8 18.0 1.4 4.5 (0.1) 3.4
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES

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Kencana (MP, FV = RM1.52)

♦ Higher utilisation rates ahead. Kencana is currently tendering for another RM4bn worth of orders, which
include fabrication contracts in Malaysia, Myanmar, Vietnam and India as well as the long-awaited Sabah Oil &
Gas Terminal. With the upgrade in the Lumut yard (i.e. tonnage handling capability increased to 30,000 tonnes
from 20,000 tonnes previously) nearing completion, we believe Kencana stands a good chance of securing
higher-margin deepwater jobs. In tandem with the growing orderbook, we highlight that FY11-12 utilisation rate
is expected to increase to 85% and 92% respectively from the estimated 45-55% in FY10. However, we
highlight the downside risk if there is any delay in fabrication jobs over the next 6-12 months amidst the
uncertain outlook for the sector.

♦ Downgraded to Market Perform. We continue to like Kencana given its: 1) proven earnings track record; 2)
strong management; and 3) plans to diversify into more recurrent earnings. However, we believe the stock will
perform no better than the market in the near term. We have thus lowered our fair value from RM1.88/share to
RM1.52/share, based on 13x FY11 PER (vs. 16x FY11 PER previously). Given the limited upside to our new fair
value, we have downgraded the stock to Market Perform (from outperform previously).

Table 6: Investment Statistics (KENP; Code: 5122) Bloomberg: KEPB MK

Net EPS Net
FYE Revenue Profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing GDY
July (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (x) (%)
2009 1,140.8 118.2 7.1 (24.3) 19.5 - 4.5 13.2 21.4 Net cash 0.4
2010f 1,458.8 169.0 10.2 42.9 13.6 9.0 2.7 10.1 19.1 Net cash 0.5
2011f 1,632.6 194.4 11.7 15.0 11.9 11.0 2.1 9.0 17.4 Net cash 0.6
2012f 1,750.0 214.2 12.9 10.2 10.8 12.0 1.7 8.1 15.5 Net cash 0.7
Mesdaq Board Listing / Non-Trustee Stock * Consensus Based On IBES

Wah Seong (MP, FV = RM2.38)

♦ Medium-term earnings growth capped by weak contribution from the engineering division. As we
highlighted above, we see potential risk in future oil & gas investments in Australia due to the proposed RSPT,
and this could also affect future pipeline projects in the country. In addition, we highlight that medium-term
earnings growth would likely be capped by still-weak contribution from the engineering division. Note that while
utilisation rates for the compressor fabrication yard in Batam remains above 70% mainly supported by
fabrication of smaller modules for Pertamina, we understand that utilisation rates for Singapore, Shah Alam and
China yards have fallen to below 50% (vs. average 70% in 2008). Nevertheless, we expect demand for gas
compressors and FPSO topsides to pick up momentum on the heels of stronger E&P activities stemming from the
long-term uptrend in crude oil price.

♦ Maintain Market Perform. Given the downward revision in our target PER from 16x to 13x, we have lowered
our fair value to RM2.38 (from RM2.57 previously), based on 13x FY11 PER (vs. 16x FY10 PER previously). With
M&A deals now pushed out, and potential for more earnings disappointment in the 2QFY10, we thus reiterate
our Market Perform call on the stock.

Table 7: Investment Statistics (WASEONG; Code: 5142) Bloomberg: WSC MK

Net
Net Basic FD FD EPS FD
FYE Turnover profit EPS# EPS# Growth PER C.EPS* P/NTA P/CF Gearing GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (x) (%)
2009 1,950.3 121.3 17.1 13.1 29.4 16.9 - 3.5 19.8 0.4 3.3
2010f 2,374.4 149.7 21.1 16.1 23.1 13.7 18.0 2.8 4.7 0.5 2.9
2011f 2,642.0 170.9 24.1 18.3 14.0 12.0 20.0 2.2 4.8 0.5 3.3
2012f 2,396.2 168.7 23.8 18.1 (1.2) 12.2 21.0 1.9 10.6 0.5 3.2
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excl EI * Consensus Based On IBES Estimates

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KNM (UP, FV = RM0.49)

♦ Higher earnings risk. With crude oil price likely to remain flattish over the medium-term which would have an
impact on non-conventional projects with higher investment hurdle rates, and notwithstanding the possible
delays in deepwater projects caused by BP’s Gulf of Mexico disaster, the demand outlook for higher-end process
equipment has become less certain again. Hence, we believe this could potentially result in: 1) lower utilisation
rates (with current 30-40% of spare capacity); and 2) delay in capacity expansion plan for its Canada plant
targeted at the oil sands projects there.

♦ FY10-12 earnings cut. All in, we have cut our FY10-12 earnings estimates by 6.4-9.9% p.a. after revising
down our capacity utilisation FY10-12 by 8-15% p.a. to factor in lower demand for process equipment. We have
also cut our target PER to 10x, from 13x previously. Nevertheless, as we have rolled forward our valuation base
year to FY11 (from FY10 previously), our fair value has been raised to RM0.49 (from RM0.40). Despite the
upward revision in fair value, KNM remains an Underperform as we see limited upside in its share price.

Table 8 : Investment Statistics (KNM; Code: 7164) Bloomberg: KNMG MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/CF P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 2,469.6 150.8 3.8 (55.2) 13.3 - (7.2) 10.2 14.8 0.6 4.0
2010f 2,053.1 114.5 2.9 (24.1) 17.5 5.0 14.2 8.0 6.3 0.6 4.0
2011f 2,462.7 194.4 4.9 69.7 10.3 7.0 11.8 5.2 10.2 0.6 4.0
2012f 2,915.4 260.9 6.5 34.2 7.7 8.0 8.6 3.4 12.5 0.5 4.0
Main Market Listing / Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES

Petra Perdana (UP, FV = RM1.15)

♦ Tussle with Petra Energy and former CEO continues to hamper the business. Although the new
management has now been in place for four months, we continue to see disruptions to management resources
from ongoing lawsuits by the former CEO, as well as well as a renewed boardroom tussle at its associate Petra
Energy. As for the business, we believe lease charges and related costs would likely impact FY10 earnings given
mobilisation costs for the eight vessels (with six vessels from China shipyard) as well as the lacklustre vessel
charter market, and this could potentially give rise to earnings disappointments in coming quarters. The delivery
of seven vessels (four AHTS, three workbarge) between Jun-Dec 2010 period could further affect costs if charter
rates and vessel utilisation do not pick up.

♦ FY10-12 forecasts cut. We have thus cut our FY10-12 EPS forecasts by 16-28% p.a. to reflect the uncertain
earnings outlook. We note however that earnings are highly sensitive to vessel charter and utilisation rates, and
any pick up in FY11 could be sharply positive for the company.

♦ Maintain Underperform. We have rolled forward our valuation base year from FY10 to FY11 but cut our target
PER from 13x to 10x. Together with the downgrade in our FY10-12 EPS forecasts, our fair value is nudged up
slightly to RM1.15 (vs. RM1.00 previously). We have thus maintained our Underperform call on the stock.

Table 9: Investment Statistics (PETRA; Code: 7108) Bloomberg: PETR MK

Net Core EPS Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA gearing ROE NDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 605.7 29.3 9.8 9.8 (53.1) 12.1 - 0.7 0.1 6.0 1.3
2010f 297.4 20.2 6.8 6.8 (31.1) 17.6 12.0 0.7 (0.2) 4.0 1.3
2011f 346.4 36.3 12.2 12.2 79.9 9.8 20.0 0.7 (0.2) 6.9 1.3
2012f 363.2 57.7 19.4 19.4 59.0 6.1 21.0 0.6 (0.2) 10.1 1.3
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excl EI * Consensus Based On IBES Estimates

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 10 June 2010

EPIC (OP, FV = RM2.72)

♦ Focus on KSB expansion. Of all the oil & gas stocks, EPIC probably has the least exposure to potential delays
in deepwater jobs, given it services mainly shallow water contractors offshore Terengganu. Management
highlighted that the company will focus on the expansion of KSB under Phase 3. The land clearing work started
in 3Q 2009 and Phase 3 would be operational in 2Q 2010. The addition of 97 acres for Phase 3 is expected to
increase KSB’s landbank to 419 acres. The company already has one confirmed customer (i.e. Total) for Phase 3
and expects another three more in the short term. We have tweaked upwards our fair value to RM2.72 (from
RM2.69 previously), based on 10x FY11 PER (vs. FY10 PER previously). We believe our target price has
adequately discounted the execution risks as well as the company’s relatively small market cap. We thus
maintain our Outperform call on the stock although we note that the current discount valuations may prevail
given the market’s aversion to illiquid stocks.

Table 10: Investment Statistics (EPIC; Code: 8265) Bloomberg: EPIC MK

Net Adj Adj EPS Net
FYE Turnover Profit EPS EPS# Growth# PER C.EPS* P/NTA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 184.0 42.3 24.9 24.9 81 6.5 - 0.9 0.5 13.4 5.4
2010f 222.7 45.6 26.9 26.9 8 6.0 28.0 0.8 0.5 13.3 5.8
2011f 232.9 46.1 27.2 27.2 1 6.0 28.0 0.7 0.5 12.3 5.9
2012f 271.5 50.8 30.0 30.0 10 5.4 30.0 0.7 0.5 12.5 6.5
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excl. EI * Consensus Based On IBES

Petronas Gas (MP, FV = RM10.71)

♦ Moving to transmission-based business. We highlight the key driver for the revised GPTA is to tap into the
growth potential of the gas transportation business arising from higher demand for processed gas transmission
(vs. unprocessed gas from offshore Peninsular Malaysia) over the long term. We believe the clear demarcation
between processing and transmission fees would enable Petronas Gas to grow its transmission-based business to
offset declining earnings from gas processing business stemming from the lower gas output in Peninsular
Malaysia. Meantime, notwithstanding lower throughput processing fees for its domestic operation, we believe
Petronas Gas still offers relatively secure earnings, guaranteed by the Reservation Charge, and this will also
underpin dividend payouts. Therefore, we believe annual dividend yields of 5-7% p.a. will likely continue to
support the share price. Hence, we reiterate our Market Perform call on the stock with unchanged DCF-based
fair value of RM10.71/share.

Table 11 : Investment Statistics (PETGAS; Code: 6033) Bloomberg: PTG MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/CF P/NTA Gearing ROE GDY

Mar (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (x) (%) (%)
2010 3,221.8 940.7 47.5 1.4 20.7 - 12.4 3.0 Net cash 11.3 5.2
2011f 3,308.3 1,238.2 62.6 31.6 15.7 60.0 10.6 3.0 Net cash 14.5 6.8
2012f 3,348.2 1,273.6 64.4 2.9 15.3 63.0 10.4 3.1 Net cash 14.5 7.0
2013f 3,411.3 1,324.8 67.0 4.0 14.7 63.0 10.1 3.1 Net cash 14.5 7.3
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

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Conclusion

♦ Sector downgraded to Neutral. Although the longer-term earnings visibility for O&G service providers
remains intact on the back of reserve replenishment activities, we believe the focus will be on the near-term
uncertainties and risk of earnings disappointment. Therefore, while we have rolled forward our valuation base
year to FY11 (from FY10 previously), we have also pulled back our target PERs for the oil & gas stocks under
coverage. Against this backdrop of uncertainty, we downgrade the sector to Neutral from overweight.

Table 12: Oil And Gas Fair Value Calculations

Share Price New FV Old FV Basis Of Valuation Rec
(RM) (RM/share) (RM/share)
After Before
Dialog 1.05 1.23 1.29 15x FY11 PER plus DCF for Kertih Terminals and OP OP
TLP tank terminals at WACC of 15%
EPIC 1.62 2.72 2.69 10x FY11 PER OP OP
Kencana 1.39 1.52 1.88 13x FY11 PER MP OP
KNM 0.50 0.49 0.40 10x FY11 PER UP UP
Petra Perdana 1.19 1.15 1.00 10x FY11 PER for operating earnings plus share UP UP
of Petra Energy fair value at 9x
Petronas Gas 9.83 10.71 10.71 DCF with WACC of 9% MP MP
SapuraCrest 2.05 2.16 2.39 13x FY11 PER MP OP
Wah Seong 2.20 2.38 2.57 13x FY11 PER MP MP
Source; RHBRI estimates

Chart 1: KNM Technical View Point

♦ After a significant rally to a high of RM1.09 in Jun
2009, the share price of KNM fell to a lower trading
range between RM0.69 and RM0.85 levels after a
sharp correction phase.

♦ However, after stabilising around the region for

nearly nine months, the stock plunged to below
RM0.69 level in Apr 2010, with a huge technical
gap at RM0.685 – RM0.725.

♦ The stock extended its losing streak and continued

to slide towards the RM0.50 key support level.

♦ But, as momentum continued to deteriorate, the

stock slipped to below the RM0.50 stronghold in
recent sessions.

♦ Technically, it is critical for the stock to regain the

RM0.50 level in the near term. Otherwise, the chart
outlook is likely to turn more bearish ahead.

♦ Next effective stronghold is only seen at RM0.385.

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IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
strategy will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts
any liability for any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB
Group may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity
securities or loans of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended
securities, subject to the duties of confidentiality, will be made available upon request.

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the actions of third parties in this respect.

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