SapuraCrest Petroleum - Massive orders to grow further from merger BUY

- We reiterate our BUY call on SapuraCrest Petroleum (SapCrest) with an unchanged fair value of RM5.94/share based on an unchanged  CY12F PE of 22x for SapuraKencana Petroleum – which arises from the group’s merger with Kencana Petroleum (Kencana).

- SapCrest’s FY12 net profit of RM310mil was within expectations. Hence, we maintain FY13F-FY14F earnings and introduce FY15F net profit with a growth of 9%, underpinned by a 5% increase in offshore installation orders. 

- The group’s FY12 net profit increase of 34% YoY was driven largely by:- (1) higher operational efficiencies, reversal of prior year provisions and higher margins towards project completions for installation of pipelines and facilities (IPF), despite a smaller scope of works in the Pan-Malaysian umbrella contract; (2) reversal of prior-year liability provisions, lower charter cost and  resolution of disputed billings for the group’s tender rig segment; and (3) turnaround in its marine division from higher asset utilisation. This was partly offset by higher investment costs due to the A$127mil (RM400mil) acquisition of Australia-listed Clough Ltd’s marine construction business. 

- The group’s 4QFY12 net profit slid 8% QoQ to RM77mil, largely due to lower activities during the monsoon season, but was largely cushioned by SapCrest’s regional IPF activities. 

- Around 41% of SapCrest’s gross order book of RM10.5bil stems from the massive US$1.4bil (RM4.2bil) contract to charter and operate three Pipe Laying Support Vessels (PLSV) for Petróleo Brasileiro S.A. (Petrobras). Combined with Kencana, the merged entity’s order book of RM13.5bil (2.5x CY12F revenue) is by far the largest in the oil & gas sector.

- But given that Kencana’s yards are only half utilised currently, we expect additional orders to further expand the merged entity’s already-huge locked-in sales. We understand that both SapCrest and Kencana are jointly bidding for over RM1bil tenders for engineering, procurement, construction, installation and commissioning (EPCIC) projects in Southern China.

- We continue to be positive on Kencana’s merger with SapuraCrest, expected to be completed by mid-May this year. Also, we expect the combined SapuraKencana’s net gearing to be manageable at 0.3x-0.5x despite the RM1.8bil capital distribution, given that its US$1.5bil capital expenditure programme for both SapCrest and Kencana will be progressive over the next three years, while Seadrill will bear half of SapCrest’s commitment to build three flexible pipe-laying support vessels in Brazil.

- The stock currently trades at an attractive CY12F PE of only 17x vis-à-vis its 2007 peak of 29x. 

Source: AmeSecurities