SapuraKencana Petroleum - Earnings dip but re-rating from new tender rig injection BUY

- We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana), with an unchanged fair value of RM3.70/share, pegged to an FY14F PE of 22x– at parity to Kencana Petroleum’s 2007 peak.

- We have lowered SapuraKencana’s FY13F net profit by 7% as the group’s 9MFY13 results came in below our expectations, with a core net profit of RM401mil (excluding exceptional items) which accounts for 72% of our earlier FY13 forecast and 74% of consensus estimate of RM593mil. But we maintain the group’s FY14-FY15F earnings on expectations of a significant acceleration in the group’s proposed acquisition of new tender rigs.

- Excluding one-off listing expenses of RM75mil and a RM42mil reversal of minority charge from the acquisition of the remaining 74% stake in construction vessel QP2000,  the group’s core 3QFY13 net profit declined 20% QoQ to RM141mil largely due to lower drilling contributions, slower progress of offshore construction works and lower vessel utilisation rates for geotechnical vessels which were drydocked for repair and maintenance. 

- The 3QFY13 earnings decline was a surprise as the group’s offshore construction, hook-up & commissioning and installation activities usually taper off towards the year-end monsoon period. As such, we expect the strong progress of works for the Pan-Malaysian umbrella installation contract in 1HFY12 to further slacken towards the end of the year whilst SapuraClough’s work at Australia’s Montara Development would have been completed. Offshore construction and subsea services accounted for 55% of the group’s 9MFY12 pre-tax profit. 

- We estimate that SapuraKencana’s order book slid 9% QoQ to RM13bil but this will surge to RM18bil (see Chart 3-4 for breakdowns) with the inclusion of the RM4.8bil built-in charter contracts for the 16 new tender rigs which will be acquired from Seadrill. The group still expects to secure RM5bil-RM6bil annually, with potential tenders of over RM30bil.

- Over the next few months, we still 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 PanMalaysian umbrella HUCC contract, which is scheduled to be announced soon.

- While the group will be preparing for a rights issue to accommodate the recent acquisition of tender rigs from Seadrill, we continue to view the development as a re-rating catalyst which will reaccelerate its forward earnings momentum. The stock’s valuation is attractive at an FY14F PE of 17x, below Kencana Petroleum’s 2007 peak of 22x.

Source: AmeSecurities