Further growing pains, but we remain positive
In spite of the negative IMS, we retain our positive stance on the shares and have calculated that fair value is 1,818p – down from our previous estimate of 1,992p, but still offering a total return of 56% on an 18-month view. We have cut our dollar EPS forecasts by 15%, 6% and 7% over each of the next three years. Whilst disappointing, the shares are very cheap here on less than 9x 2016 EPS, and the order backlog and outlook remain extremely positive; we have increased our order backlog estimates by an average of 8%. This strength could drive earnings upgrades at some point. While further risks to earnings cannot be ruled out, we feel that they are much reduced after this latest reset.
Expectations reduced for IES
Petrofac Ltd London (OTC:POFCF) released its IMS a week early on Friday. It reset expectations for attributable profit to $580-600m for 2014 compared to our previous expectation of $688m. Attributable profit estimates have also fallen for 2015 – we are now at $730m whereas we were previously forecasting $785m. The driver of these reductions arises from IES, and is threefold: a delay in production for the Upper Stella field, the continued suspension of production at the Ticleni field in Romania and the removal of Seven Energy as an associate from forecasts, as a result of the holding falling to 15%.
Further upgrades made to the order backlog
In spite of the negative news from IES, the outlook for the rest of Petrofac, particularly the OEC division, looks very encouraging. We have upgraded our forecasts for the order backlog by an average of 8% over each of the next three years. On the IMS call, the company said it was the lower bidder on $2-3bn of contracts on which it expected to hear a result by the end of June. If it was awarded $2bn of new orders, our 2014 order backlog estimate would need to increase by a further 11%. Historically, the order backlog has driven the stock price, because it is a proxy for future earnings, and could be a key catalyst for stock performance.
Valuation low in spite of the earnings downgrade
Our fair valuation moves to 1,818p from 1,992p. This is calculated on Petrofac moving back to its average forward P/E premium of 20% compared to the European market. This is based on an 18-month view and would place the company on a 2016 P/E of 12.9x and an EV/EBITDA multiple of 7.6x. Fair value is in the context of dollar earnings growth for 2015 and 2016 of 25% and 14% respectively.
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