SapuraKencana Petroleum - Slight impact from Mexican charter for Sapura3000 HOLD

- We downgrade our call on SapuraKencana Petroleum (SapuraKencana) from BUY to HOLD, with a lower fair value of RM2.60/share (vs. RM3.00/share previously), pegged to a lower FY14F PE of 18x vs. 20x earlier – 20% above the oil & gas sector’s 15x currently.

- We have lowered FY14F-FY15F net profits by 2%-4% due to lower fabrication contracts and margin assumptions next year. Our FY15F net profit is 7% below consensus, likely  due to lower margin assumptions from the group’s three flexible pipelay charters for Petrobras. 

- SapuraKencana’s 50%-owned SapuraAcergy Sdn Bhd has secured a US$45mil (RM140mil) charter from Construcciones Maritimas Mexicanas S.A. de C.V. for its pipelay-heavy lift construction vessel Sapura 3000. The 125-day contract, which commenced on 18 August 2012, involves heavy lifts in the Gulf of Mexico region. Recall that SapuraAcergy is a 50:50 JV Subsea 7 S.A.

- Including this contract, we estimate that SapuraKencana has secured RM3.1bil (including the RM1.3bil extension of the PanMalaysian contract to install pipelines and facilities) of new contracts year-to-date. This is within our new order assumption of RM5bil for FY13F.

- We estimate that SapuraKencana’s order book has risen slightly to RM15bil – still the largest in the country vis-a-vis Bumi Armada’s RM10bil. Accounting for 2.5x of SapuraKencana’s CY12F merged revenues, earnings for the next two years are already locked-in.

- For the rest of the year, we expect a higher magnitude of newsflow for hook-up, construction and commissioning (HUCC) works vs. pure fabrication jobs. The tenders which the group is bidding for include the RM8bil-RM10bil Pan-Malaysian umbrella HUCC contract and RM600mil subsea maintenance job, which is scheduled to be announced by the end of this year.

- The smaller fabrication jobs such as two wellhead platforms for the Bunga Dahlia and Teratai fields in Blocks 301 & 302 may be announced later this year. But the larger central processing platform and multiple wellhead platforms for the North Malay gas basin Phase 2 development may only materialise next year. Likewise, the rollout for the Bokor, Dulang and Semarang fields may also be deferred.

- SapuraKencana’s valuations are currently fair at an FY14F PE of 16x, which is at a 5% premium to the sector. We also do not discount the possibility of Seadrill disposing of its remaining PP 12247/06/2013 (032380) 6% in SapuraKencana to fund its asset expansions in Brazil. 

Source: AmeSecurities