- We recently met up with Kencana Petroleum (Kencana) and
came away reaffirmed in our conviction that its merger, likely to be completed
before the end of May this year, with SapuraCrest Petroleum (SapCrest) into the
new entity SapuraKencana Petroleum (SapuraKencana) will transform the playing
field of the industry. We maintain BUYs for both Kencana and SapCrest as their
merger will enhance their capabilities in securing larger order prospects and
reenergize earnings growth momentum. Besides additional contract newsflow, the
group is eager to secure two additional risk-sharing marginal field contract,
similar to Berantai in which the merged entity will have a 50% stake.
- The merger will transform Malaysia’s O&G services as
the resulting entity will have a dominant 70% market share of offshore installation
work with stakes in four derrick lay vessels (excluding five pipelay/derrick
vessels under construction), sole tender rig owner/operator with a fleet of 6
units, one of two current marginal field contract concessionaires and one of
only two major fabrication yard (the other being Malaysia Marine & Heavy
Engineering Holdings) in the country. Other services which provide a complete
integrated solution for oil majors include marine services via a fleet of
diving/support vessels, survey vessels, remote-operated vessels, accommodation
workboats and anchor handling tug supply vessels.
- SapuraKencana’s order book of RM13.5bil remains the
largest in the country, larger than Bumi Armada’s RM10bil which includes RM3bil
renewable options. With a yard utilisation of only 50% currently, Kencana’s
order book is still set to grow with a tender book of RM5-6bil of which over
55% stems from Australia’s huge offshore gas fields and the rest from Malaysia.
Additionally, both SapCrest and Kencana are jointly bidding for over RM1bil
tenders for engineering, procurement, construction, installation and
commissioning (EPCIC) projects in Southern China.
- SapuraKencana’s potential market capitalisation of over
RM10bil rivals Bumi Armada and will likely lead to its inclusion in theFBMKLCI
and MSCI indices. As foreign institutional funds are still in the low teens for
the two companies, the inclusion in themajor indices will naturally likely
retain the group’s premium valuations of over 20x despite a proforma net
gearing of 0.4x (compared to 0.5x for Bumi Armada). We expect its net gearing
to be manageable at 0.3x-0.5x despite the US$1.5bil capital expenditure
programme for both SapCrest and Kencana as the spending will be progressive
over the next three years while Seadrill will bear half of SapCrest’s
commitment to build three flexible pipelaying support vessels in Brazil.
- We have upgraded Kencana’s FY12F-FY14F net profit by
11%-15% by incorporating the contributions of Allied Marine & Equipment,
which was acquired in July last year. We have also raised SapCrest’s
FY12F-FY14F earnings by 7%-11%, largely due to the turnaround in the group’s
marine operations which have been suffering losses until 3QFY11.
- The higher earnings forecasts translate to a 15% increase
in our fair value to RM2.68/share (from RM2.43/share previously) for
SapuraKencana, which is still pegged to an unchanged CY12F PE of 22x, at parity
to Kencana’s 2007 peak (See our report dated 12 July 2011). This translates to
the raising of our fair value for Kencana to RM3.86/share (from RM3.54/share earlier)
and SapCrest to RM5.94/share (from RM5.44/share earlier). But our top pick
remains MMHE - a laggard with muted expectations - but expected to surprise on
fresh order newsflows.
Source: AmeSecurities
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