SapuraKencana Petroleum - Balancing growth with highly value-accretive M&A BUY

- We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana) with an unchanged fair value of RM3.70/share which is based on an FY14F PE of 22x, which is the 2007 peak achieved by Kencana Petroleum. 

- With a better insight into the US$2.9bil rig acquisitions from Seadrill comprising 10 tender-assisted rigs (TAGs) plus a 49%-stake each in 5 TAGs and 5 TAGs under construction, we have fine-tuned SapuraKencana’s FY14F-FY15F EPS with a 3%-5% adjustment in the TAGs’ earnings assumption. Note that our FY14F-FY15F earnings are 14%-16% above consensus.

- We have assumed an average net profit generation of US$25mil per rig. Based on our estimates that the enterprise value of the acquisition will be funded on a 70:30  debt-to-equity ratio, this translates into a highly value-accretive PE of only 3x and enterprise value/net profit ratio of 10x.

- We have also lowered the increase in the group’s share base by 2% from a higher share placement price assumption of RM3.00/share vs. RM2.60/share earlier given the appreciation in the stock price after the announcement of the deal. 

- The recent RAM report indicating the group’s rating is being monitored due to this transaction is not a concern  as we estimate that the group’s net gearing of 1.2x immediately upon completion of the transaction next month could moderate to 90% by end-FY14F. 

- While the group’s capex pipeline of US$1.4bil (including 2 derrick-lay vessels, 3 flexible pipe-lay support vessels (PLSV) and 2 more tender rigs) remains sizeable, we note that US$500mil from the 50%-owned PLSV will be funded largely off-balance sheet. 

- SapuraKencana has also submitted a fresh bid to Petrobras to provide 5 new PLSVs, which could easily cost US$1.5bil if the group secures the tender. But assuming a 20:80 debt-to-equity financing, we estimate that the group’s net gearing can be retained below the threshold of 1x given the group’s net profit of RM1.2bil-RM1.3bil annually. Hence, we do not expect another equity-raising exercise over the next 1-2 years following this development.

- The group’s tender book of RM30bil currently includes bids of RM11bil that have been submitted, including for the 5 new Petrobras PLSVs. But the group is also eyeing directly- negotiated jobs involving 10 large central processing platform jobs in Malaysia this year.

- SapuraKencana’s valuations are currently attractive at an FY14F PE of 19x, which is at a 17% discount to Kencana Petroleum’s peak in 2007.   

Source: AmeSecurities