Monday 16 July 2012

Sapura Kencana Petroleum - Taking Control Of Quippo-Prakash Pte Ltd


News    Sapura Kencana Petroleum (“SKPETRO”) announced that it had entered into a Share Sale Agreement for the remaining 74% interest in Quippo-Prakash Pte Ltd. (QP) for a sum of US$22.5m (RM69.8m). QP owns the asset QP2000 (a Derrick Pipe Lay cum Accommodation Barge (DLB) with 2000mt crane capacity) which SapuraCrest took a 26% stake in back in 2008. The purchase is expected to be completed within the next two months.

The rationale for the purchase is to enable SKPETRO to have a better control of the asset’s project scheduling and cost structure.

Comments          According to the announcement, as at 31st Mar 2012, QP's net profit was US$3.9m (RM12.1m) and its net assets were US$32.2m. This means the acquisition price is at 5.7x PER and 0.7x net asset, which in our view is fair.

At this juncture, we believe QP2000 is mainly utilised for the in-house Pan Malaysia contract that is under another subsidiary of SKPETRO, TLO Offshore. As such, QP2000’s revenue is SKPETRO's cost and QP2000’s earnings from other projects (besides the Pan Malaysia project) are SKPETRO’s associate earnings.

We are positive on the purchase as it implies better asset management for SKPETRO, which will also lead to margin accretion. However, we believe any near term margin accretion is minimal until the company starts to redeploy the asset for more third party contracts going ahead.

Outlook                               We are positive on the merged entity for its scale and existing global track record, which will enhance its competitive edge during new contract bids.

Forecast               Maintaining our earnings estimates as we believe near term earnings accretion will be minimal. We await 2QFY13 quarterly results for better clarity on margin accretion from the synergy of the two businesses.


Rating   MAINTAIN OUTPERFORM

Valuation            Unchanged target price of RM2.51 is based on 18x target PER on CY13 EPS.

Risks      1) Integration challenges given the size and scale of both companies, 2) the need to continuously win sizeable contracts to support bottom line growth and 3) intense competition to gain international projects.


Source: Kenanga

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