SapuraKencana Petroleum - Best In Its Class

A product of a merger in mid-May, SKPETRO is one of the two largest non-Petronas linked players on Bursa Malaysia.  Its significant scale, service range and established global track record make it one of the main beneficiaries of the domestic EPCIC opportunities. Whilst longstanding relationship with international heavyweights opens doors to global opportunities. We are estimating a 2-year net profit CAGR of 25.8% on the back of: 1) its current sizeable order book (~RM14.5b); and 2) maiden contributions from its first marginal field (Berantai). Longer term prospects seem similarly bright as SKPETRO’s has strong domestic presence and is also in the midst of expanding its asset fleet. Given our confidence in the company, we have an OUTPERFORM call on the stock with a fair value of RM2.80. We rate SKPETRO as one of the Top 5 Picks for our 4QCY12 Investment Strategy.

A synergistic merger.  Back in mid-2011, two companies i.e. Sapuracrest Petroleum and Kencana Petroleum, announced that they would be merging. The feedback was positive then, as many foresaw that the merged entity’s product offerings would accommodate a majority of the Engineering Procurement Construction Installation and Commissioning (EPCIC) value chain. Currently, the merged entity is one of  the largest non-Petronas linked players on Bursa Malaysia. It boasts: 1) a significant and diversified asset base; 2) an established global execution track record; and 3) a long-standing working relationships with international oilfield service heavyweights like Subsea7 and Seadrill.

Order book is “best in the industry”. SKPETRO’s latest order book was RM14.5b. In comparison to other local heavyweights, MMHE has an order book of RM2.8b while Bumi Armada has an order book of RM7.0b. Even excluding the longer term Petrobras contract worth RM4.3b (which will only kick start by end-14), SKPETRO possesses the largest  domestic order backlog. The order book also seems to be growing as SKPETRO has been consistently winning new contracts, albeit 2012 being a relatively sluggish domestic contract award year so  far.  YTD,  it  has  locked  in  around  RM3.3b  of  new  wins,  and  we  are  pretty sure it will be one of the local participants for at least another marginal field when Petronas finally kick-starts the award rounds, expected later this year. 

Forward prospects seem similarly bright. Current tender book was guided at a hefty c.RM25b. In our view, SKPETRO is a strong contender within the domestic EPC market and pretty much the market leader in the domestic IC segment. As such, continual domestic contract  wins  is  unlikely  to  be  an  issue. Globally, SKPETRO’s reach now spans South-East Asia, North America, Brazil and Australia. Hence, further international wins are also highly possible. The company is currently undergoing asset expansions, which will further support its chances in securing new contracts. 

2-year net profit CAGR of 25.8%.  Our FY13-14 net profit estimates are driven by: 1) SKPETRO’s current sizeable order book; and 2) maiden contributions from its first marginal field (Berantai). Earnings trend from FY15 onwards earnings could be significantly higher on account of: 1) The Petrobras contract starting up; 2) full year earnings from Berantai; and 3) potential cost savings as SKPETRO mobilises more of  its own assets. We will review its normalised margin trends before introducing our FY15 estimates.

OUTPERFORM call maintained.  Given our confidence that SKPETRO’s prospects remain bright, we have accorded it with the highest target PER of 20x (versus the industry’s average of 15x and MMHE’s target PER of 18x). We thus have an OUTPERFORM  call on the stock with a fair value of RM2.80. It is also one of the Top 5 Picks for our 4QCY12 Investment Strategy.

Source: Kenanga