We maintain our HOLD recommendation on SapuraKencana Petroleum with an unchanged fair value of RM1.40/share, based on FY17F book value which incorporates 50% discount on the group

We maintain our HOLD recommendation on SapuraKencana Petroleum with an unchanged fair value of RM1.40/share, based on FY17F book value which incorporates 50% discount on the group’s intangible assets. SapuraKencana’s 1HFY17 net profit of RM223mil came in above expectations, almost double our earlier FY17F and 21% above street’s RM210mil. Nevertheless, management maintains its FY17F earnings guidance of RM100mil-RM200mil due to the prolonged low level of O&G capex spending. Hence, we have left FY17F-FY18F earnings largely unchanged as the group’s 2HFY17 may register losses from the absence of any further contribution from the Berantai risk sharing contract (RSC), 2 more rigs being out of charter and seasonally weak 4Q. The group did not declare an interim dividend as expected.

QoQ, SapuraKencana’s 2QFY17 revenue decreased 14% to RM1.7bil from lower progress recognition in the engineering and construction (E&C) segment and lower rig utilisation. However, 2QFY17 pretax profit rose 50% from higher E&C margin, 74% increase in associate contribution from the Berantai RSC cessation and US$10/barrel increase in lifting crude oil prices to US$48/barrel for the energy division. A higher 2QFY17 effective tax rate of 40% (vs. 12% in 1QFY17) led to only a slight increase in net profit to RM112mil. Excluding the one-off gain of RM37mil from the Berantai risk sharing contract (RSC) cessation in July this year, the group’s normalised net profit would have been 33% lower at RM75mil.

YoY, the group’s 1HFY17 revenue fell 29% YoY in tandem with net profit dropping by 39%. The pretax profit of the group’s E&C segment decreased 62% and drilling by 52%, which was partly offset by the Berantai RSC’s pre-tax gain of RM82mil. During the quarter, the T-20 tender rig was stacked, leading to 6 rigs which were not in operation. The other rigs which were stacked were T-11, T19, Teknik Berkat as well as semi-tenders Setia and Menang.

We understand that the semi-tenders Jaya and Alliance will be off charter before the end of the year. If there are no charter replenishments by end-FY17F, half of the group’s fleet would be unutilised and operating potentially below PATAMI breakeven levels. With the loss of Berantai RSC orders, the group’s order book declined 11% QoQ to RM17.7bil, of which RM3.4bil will be recognised in FY18F and RM9.9bil in FY19F onwards. The stock currently trades at a 27% discount to book value due to its weak near-term earnings outlook and high net gearing of 1.3x. If crude oil prices remain at the current level, management indicated that there may not be any need for any further impairments.

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