SapuraKencana Petroleum - OUTPERFORM - 28 June 2012

Our visit to Sapura Kencana Petroleum (“SKPETRO”) left us with a more conservative outlook as we learnt of several factors that could negatively impact FY13 net profit most notably 1) the adoption of the acquisition accounting method for the merger between Sapuracrest and Kencana that limits the portion of earnings from the acquiree company and 2) the delay in the Gumusut-Kakap and Berantai marginal field projects. In the longer run, the prospects are still positive as 1) SKPETRO’s new assets are on track for their respective deliveries dates and 2) management sees significant synergies from the merger. In light of the negative short term news, our FY13-14E net profits are reduced by 21.6% and 3.1% respectively  to RM469.1m and RM719.2m (previously RM598.5m and RM742m respectively). This reduces our target price to RM2.51 (from RM2.63) based on an unchanged 18x CY13 PER. However, given the still 13.1% potential upside from the current share price, we are keeping our OUTPERFORM call on the stock. 

Acquisition accounting policy could result in lower FY13 earnings. We learnt that the merger between Sapura and Kencana will only feature 12 months’ of the acquirer’s earnings and 8 months of the acquiree’s earnings. Besides that, there could be higher merger costs of RM130m (versus our previously assumed RM110m). These occurrences put a dampener to FY13 net earnings.

Gumusut-Kakap delay will impact Sapura-Acergy contribution.  We reconfirmed that the delivery of the Gumusut-Kakap Floating Platform System (FPS) has been delayed to Apr-CY2013. Given that the delay was not caused by SKPETRO, we suspect Petronas will favour the company should new installations or subsea work arise. If not, the company’s significant reach (post-merger) is likely to enhance its chances in finding international work. This will help mitigate the shortfall in contracts for FY13. 

Updates on Berantai marginal field.  The delivery of the Berantai FPSO has been delayed to the later part of 2012. As such, first production date and consequently, recognition of the net profits are also pushed forward. We had initially assumed FY13-14E marginal field contributions at RM33.9m and RM161.3m respectively. However, given the update, we have thus moved our estimates to FY14 (from FY13). However, we higlight meaningful contribution will only be by FY15.

Long-run prospects still intact. While the near-term outlook is disappointing, we believe the long-run prospects of the company are significantly positive. Order book has grown slightly to RM14.3b (from RM13.5b previously) with more than 50% of the contracts being in the international segment. Tender book is a hefty RM10b and we positive on SKPETRO’s chances to win new projects given its enlarged scale and technical capabilities. SKPETRO’s new assets are on track for their respective delivery dates (2 derrick lay vessels (DLV); 3 Pipe Laying Support Vessels (PLSVs); 2 drilling rigs) in end-2013 to 2014. This will set the tone for its forward earnings prospects.

Forecasts revised.  In light of the negative short-term news, we have 1) reduced our FY13 revenue by 14% to account for the potential lower contribution from the accounting policy adopted, 2) reduced our FY13 JV contribution by 11.8% to account for the delay of the Gumusut-Kakap project and 3) removed our FY13 and FY14 Berantai marginal forecasts. We have also 1) eased on the financing costs and tax rate assumptions for FY13-14 to be in line with the historical rates of the company. We have not increased our FY14 JV earnings to account for the spill-over of the Gumusut-Kakap project as we foresee the project will take up most of the schedule, thus reducing the need for new wins. Overall, our net forecasts are reduced by 17.3% and 3.1% respectively. 

FY15 earnings introduced only after 2QFY12 earnings. We highlight that most of SKPETRO’s new assets and around RM4.3b of its order book (Petrobras contract) will only contribute meaningfully by FY15. However, given the fluidity of the company’s accounting policies, we have opted to wait for the 2QFY12 earnings before introducing our FY15 forecasts. Note that the company has been exempted  from reporting its 1QFY12 results as its merger only took place in May (making results below a quarter).

OUTPERFORM call maintained. Based on an unchanged 18x CY13 PER, our net profit revisions have reduced our target price to RM2.51 (from RM2.63). However, given there is still 13.1% potential upside from the current share price, we are keeping our OUTPERFORM call on the stock.

Source: Kenanga