We take the recent run-up in Sapura Kencana’s (“SKPETRO”)
share price as a sign that investors view the company as the main beneficiary
for domestic contract awards that are rumoured to be up for tender in the
coming months. In our view, the positive interest will continue given that the
stock could likely enter the FBMKLCI index by early Dec. As such, while we are
maintaining our FY13-14 earnings estimates (as we await the company’s 2QFY12
results for a better visibility of its merger synergies), we have tactically
increased our PER target for the stock to 20x (from 18x previously), lifting
our fair value for the stock to RM2.79 (previously RM2.51). We believe the
revised PER is not a stretch for SKPETRO, given that some domestic oil and gas
counters have historically been able to reach trading PERs of 30-40x. We continue
to favour the company for its scale and existing global track record, which
will enhance its competitive edge during new contract bids.
Contract awards could
be incoming. Recently, there been a slew of news that several domestic
projects are tipped for tenders in 2H12 to earlyCY13. For example, they are
the: 1) North Malay Basin development; 2)
Malikai platform fabrication project; 3) EPCIC for Dulang and Samarang oil
fields; 4) fabrication for the Bokor redevelopment; 5) the front-end engineering
and design tenders for Block SK 316 in Sarawak; and 6) the potential third
marginal field award to Coastal Energy. Such news have been a positive booster
for the sector, which had remained relatively quiet (in regards to contract
awards) in 1H12.
Main contender for
domestic contracts. While not all projects are at the fabrication and
installation stages yet (where SKPETRO holds market dominance); after the
merger, we believe that investors view it as one of the main domestic
beneficiaries given its extensive scale and service capabilities that cater
throughout the whole Engineering,
Procurement, Construction, Installation and Commissioning (EPCIC) value chain.
Drivers of share
price gains. The above factors have
been the main drivers for the steady gain in SKPETRO’s share price (+8.1%) in
the past two weeks. We expect the positive
share price trend to continue as SKPETRO will very likely be included in
the FBMKLCI index by early Dec. Possible
inclusion in FBMKLCI by early Dec. We had highlighted in our 3Q12 House Strategy
that SKPETRO will very likely be
included in the FBMKLCI index in its next round of evaluation in early-December
given its significant market capitalisation (“market cap”). The stock’s market
cap is currently larger than
both Bumi Armada
(“BAB”, market cap
of RM11.6b) and Malaysia Marine
and Heavy Engineering Holdings (“MMHE”, market cap of RM8.6b), the two lower
weighted oil and gas stocks in the index. Other stocks in the index carrying
higher weightings are Petronas Chemicals (OP; TP: RM7.46), Petronas Gas
(NON-RATED) and Petronas Dagangan (NONRATED).
Stock rerating after
FBMKLCI inclusion? We note that both BAB (NON RATED) and MMHE (UP; TP:
RM4.65) are currently trading at forward PERs of 19.0x and 22.6x respectively.
This is above the 17.0x that SKPETRO is presently
trading at for its CY13 earnings. Given the PER differential, we believe that
SKPETRO will see a rerating as it approaches December. The inclusion of SKPETRO
could also lead to a de-rating for MMHE, on the other hand, given the stock’s
current low index weighting (0.48%).
Source: Kenanga
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