SapuraKencana Petroleum - Dominant offshore service provider Fair Value : RM2.68

-  We initiate coverage of SapuraKencana Petroleum (SapuraKencana) with a fair value of RM2.68/share, pegged to an FY13F PE of 22x (excluding one-off merger costs of RM131mil), almost at par with an average of 21x for oil & gas stocks with a market capitalisation of over RM5bil. We have rolled forward our valuation benchmark from CY12F PE of 22x, as indicated in our report on 21 March this year.

-  There are no rivals domestically in terms of the comprehensive range and scope of services provided by SapuraKencana. The group provides one-stop service solutions to oil & gas majors by leveraging on its formidable assets to fabricate and install offshore structures with a reach that extends throughout Asia Pacific, India, the Middle East, Latin America, North America and Africa. Its nearest competitors are multi-nationals such as McDermott International, Saipem and Technip.

-  SapuraKencana will be able to synergise the complementary businesses of its merged units with an enlarged balance sheet to enhance their capabilities in securing larger order prospects and reenergise earnings growth momentum. 

-  SapuraKencana’s order book of RM14bil remains the largest in the country, larger than Bumi Armada’s RM10bil which includes RM3bil renewable options. Accounting for 2.5x of SapuraKencana’s CY12F merged revenues, earnings for the next two years are already locked-in.

-  SapuraKencana’s tender book of RM12.5bil, of which half stems from overseas projects, will drive the group’s earnings prospects. The group’s 50%-owned joint venture with Seadrill is eager to participate in Petrobras’ next batch of seven flexible pipe-lay vessels.

-  Domestically, we expect SapuraKencana to benefit from fresh news over the next few months from Petronas’ RM15bil fast-tracked programme to develop gas reserves from a cluster of fields in the North Malay basin, off Peninsular Malaysia as well as other enhanced oil recovery jobs in East Malaysia as well as additional marginal field concessions.

-  We expect the group’s balance sheet to remain manageable as net gearing will drop from 0.9x to 0.7x over the next two years, net of progressive capital expenditures and equity contribution of joint venture partners.

-  SapuraKencana, which will be listed tomorrow, will have a potential market capitalisation of over RM10bil rivalling Bumi Armada and will likely lead to its inclusion in the FBMKLCI and MSCI indices. As foreign institutional investors’ holdings are still in the low teens for the two companies, the inclusion in the major indices will naturally likely retain the group’s premium valuation of over 20x.

Source: AmeSecurities