AmWatch - SapuraKencana Petroleum : Strong 1QFY15 with fresh RM1.3bil EPCIC contract BUY, 20 Jun 2014

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SapuraKencana Petroleum : Strong 1QFY15 with fresh RM1.3bil EPCIC contract                                   BUY

We maintain our BUY recommendation on SapuraKencana Petroleum (SapuraKencana) with an unchanged fair value of RM5.70/share, based on an FY16F PE of 22x, which is the 2007 peak achieved by Kencana Petroleum.

We maintain SapuraKencana’s core FY15F-FY17F net profit as its 1QFY15 core net profit of RM334mil was within our and consensus expectations – accounting for 24% of our FY15F estimate and 22% of street’s RM1,460mil. This excludes one-off pre-acquisition economic benefit of RM178mil from Newfield’s Malaysian production assets, which was acquired on 11 February 2014.

As the group declared an unexpected interim tax-exempt dividend of 2.35 sen (including a special 1 sen), we have raised our DPS by 2.2 sen for FY15F and 0.1 sen for FY16F-FY17F.

Excluding exceptional items arising from the Newfield pre-acquisition income and 4QFY14 one-off transaction costs, SapuraKencana’s 1QFY15 net profit rose by 12% QoQ largely due to a seasonal rebound in the offshore construction division, which was not as active during the monsoon season in 4QFY14. This was partly offset by a weaker drilling performance due to the loss of income from the West Menang tender rig which was undergoing unscheduled maintenance.

On a YoY comparison, SapuraKencana’s 1QFY15 earnings surged by 134%, propelled by the Seadrill tender rig acquisition in April 2013 and the maiden contribution of the Newfield assets. The group also announced that it has secured US$415mil (RM1.3bil) in contracts to provide engineering, procurement, construction, installation and commissioning works for 2 project.

Since the beginning of 2014, the group has secured RM6.1bil in new contract awards. Including the recent drilling charter awards, the group’s order book has risen by 18% QoQ from RM25.4bil to RM30bil (2.7x of FY15F revenue) and remains the largest within the O&G sector. We remain positive on the group’s order book accretion and it remains on the prowl for fresh tenders of RM30bil.

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