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Petrofac's growth prospects in MENA no mirage, JP Morgan says
JP Morgan upped its target for shares of Petrofac even after the consensus forecast for the company's earnings per share in 2019 had been revised up by 25% since the start of 2018, pointing to multiple factors that might drive further upside.
According to analysts James Thompson and Christyan F Malek, an improvement in market dynamics would follow from fiscal year 2018 order intake in Engineering and Construction at the upper end of expectations, a successful bond refinancing (expected in May), more non-core disposals and a favourable outcome to the Serious Fraud Office's inquiry.
Their raised target price, which was upped from 590p to 680p, also followed the outfit's first site visit in eight years, which the analysts said had butressed their confidence in the medium-term outlook for Petrofac.
It had also revealed that spending growth in the Middle East and North Africa was again on the up and yielded improved insights into the company's core abilities and competitive advantages, they said.
Indeed, the return of confidence in the core MENA markets underpinned prospects for the firm's order pipeline over the medium-term.
So while Kuwait was to remain a revenue focus, "growth ambitions" were also mirrored in Algeria, UAE and Saudi, the analysts said citing company presentations.
On the back of all of the above, and with 13% upside to its new target for the shares, the investment bank also reiterated its 'overweight' recommendation for the shares.
"It showed us that, while the share price may have been derailed by the SFO, the company hasn't. We update our forecasts, narrowing our SOTP discount as the outlook improves and including the sale of JSD6000," it said.
The sale of JSD600 was important as a signal of the firm's commitment to move back towards an "asset-light" model, JP Morgan said.
It would also help with the upcoming bond refinancing.
"Our E&C order intake focus stays with Kuwait, but also looks to Algeria, Saudi, Iraq and Thailand as we move towards 2H."