SapuraKencana Petroleum - Almost a tie in bid for new Petrobras PLSV charters BUY

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

- Upstream reported that Seadrill-SapuraKencana and TechnipNorSkan are racing neck-and-neck to secure the next batch of 6-7 pipe-lay flexible support vessel (PLSV) charters, potentially worth over US$5bil, earmarked to work in the Brazilian pre-salt play.

- For the initial 6 vessels, Petrobras may split three contracts each between Seadrill-Sapura and Technip-NorSkan, likely picking two vessels from each category in the tender. While a seventh PLSV may be awarded to Subsea 7 if Petrobras opts to diversify the risk, Seadrill-SapuraKencana and TechnipNorskan are seen to be best-placed to secure the bulk of the fresh charters.

- In our view, Seadrill-SapuraKencana appears likely to get at least three of the PLSVs, given that Petrobras may need to diversify contracting risks to more players.

- As indicated in our report early this month, we estimate that SapuraKencana’s net gearing of 1.2x immediately upon the US$2.9bil acquisition of Searill’s tender rigs next month could moderate to 90% by end-FY14F. This assumes that theproposed placement exercise leads to 969mil new SapuraKencana shares at RM3.00/share.

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

- Assuming that SapuraKencana secures the 3 new PLSVs, which we understand could cost around US$300mil each, the group’s forward net gearing is unlikely to rise significantly above 1x given the group’s net profit of RM1.2bil-RM1.3bil annually.  Note that the group’s equity contribution for the new PLSVs may amount to only RM90mil assuming a 20:80 debt-toequity financing for the 50:50 JV with Seadrill.

- Hence, we maintain our view that another equity-raising exercise may not the required over the next 1-2 years following the current placement proposal. We also maintain FY13F-FY15F net profits as any contributions from the prospective Petrobras PLSVs are likely to come in beyond FY15F. 

- SapuraKencana’s valuations are currently attractive at an FY14F PE of 18x, which is at an 18% discount to Kencana Petroleum’s peak in 2007.   

Source: AmeSecurities