SapuraKencana Petroleum - Core earnings on track to greater heights

-  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 – on par with Kencana Petroleum’s 2007 peak.

-  The group’s FY13 core net profit of RM558mil (excluding 9MFY13 exceptional items of RM34mil) came in within our earlier FY13 forecast of RM565mil and consensus estimate of RM568mil.

-  We understand that there was some one-off cost in 4QFY13 arising from the acquisition of Seadrill’s tender rigs, but the quantum is uncertain at this juncture pending an analyst briefing later today.

-  Hence, we have fine-tuned FY14F-FY15F net profits and introduce FY16F earnings with a growth of 18% driven by fullyear contributions of 5 additional tender rigs currently under construction.

-  Excluding the RM42mil reversal of minority charge from the acquisition of the remaining 74% stake in construction vessel QP2000 in 3QFY13, we estimate that the group’s core 4QFY13 net profit fell 12% QoQ to RM124mil as the seasonal decline in progress work from the offshore construction & installation activities was partly offset by contributions from the group’s 50%-owned Berantai marginal field project and fabrication activities.

-  Offshore construction and subsea services accounted for half of the group’s FY13 pre-tax profit, and fabrication, hookup & commission/offshore support vessels and energy/joint ventures at 27% and 23%, respectively.

-  We estimate that SapuraKencana’s order book slid 15% QoQ to RM11bil currently from the quarterly depletion, but this will surge to RM16bil (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 and 6 new flexible pipelay construction vessel charters from Petrobras.

-  SapuraKencana’s valuations are currently attractive at an FY14F PE of 18x, which is at an 18% discount to Kencana PP 12247/06/2013 (032380) Petroleum’s peak in 2007.

Source: AmeSecurities