Canaccord reiterates 'hold' rating on Petrofac

Canaccord Genuity on Tuesday reiterated a ‘hold’ rating on Petrofac but raised the target price to 900p from 850p.

The broker said Petrofac has an “impressive record” from its initial public offering in 2007, showing resilience through the oil industry’s 2008-09 crisis.

Petrofac’s core Middle East North Africa-CIS lump-sum engineering and construction business has performed reliably year after year, with steady profits despite swings in order intake and customer sentiment, Canaccord said.

“The group chose to diversify into a range of other activities: operations & maintenance (O&M), upstream projects, and North Sea lump-sum work; whilst its record in these investments is much better than is generally perceived (Malaysia & O&M have gone very well) there have been several high-profile misses, leading to a series of profit warnings since 2014,” Canaccord said.

“With the decision to largely exit these positions we believe the chance of further such warnings is now limited.”

Canaccord said there, however, remains some legacy issues, including its Stella project, five Mexican contracts and a part-complete construction vessel and a cancelled contract on its deepwater multi-purpose offshore vessel JSD 6000.

The group's strategy beyond this retrenchment remains an open question, Canaccord said.

“The original arguments for diversification rested on stretching Petrofac's undoubted capabilities and track record into new markets, but also on the observation that the core MENA-CIS business was unlikely to grow much further.

“We don't think much has changed: Petrofac still enjoys a c.20% market share of in those parts of that market it currently addresses.”

The broker added: “This core addressable market has grown beyond original expectations, but it is unlikely to deliver Petrofac's aspirations for revenue growth in the medium term.

“Whilst there have been some hints of the future strategy - notably going more into downstream and petrochemicals, and exploring further Asian markets - we don't as yet see a clear future path.”

Canaccord raised its earnings per share forecast by 2016 by 20% but lowered its estimate by 1% in 2017 following Petrofac’s trading update last week.

Petrofac said full year net profit is expected to be about $410m in 2016, in line with previous guidance.

"We are on track to deliver positive results in 2016 in line with guidance reflecting record revenues, solid operational performance across all of our businesses and the delivery of significant cost savings," said CEO Ayman Asfari in a statement.