- 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.

- SapuraKencana has revised its proposed acquisition of Seadrill’s tender-assisted rigs (TAG) with a 587 million new share placement at a slightly higher RM2.80/share to investors, replacing the earlier plan to issue US$238mil of 3-year redeemable exchangeable preference shares (REPS) which had an exchange price of RM2.70/unit to Seadrill and 300mil new additional placement shares.

- Our channel checks confirm that the issuance of US$350mil worth of SapuraKencana shares remain at RM2.70/share to Seadrill. The group has appointed CIMB Investment Bank and Maybank Investment Bank as the placement agents, with completion of the exercise latest by 29 April this year.

- The revision translates into a debt:equity financing of 70:30 for the entire US$2.9bil acquisition, which encompasses 10 new TAGs, 49% stake in TAGs operating in Malaysia, 5 partiallycompleted TAGs and management of 3 TAGs owned by Seadrill. Also, Seadrill’s equity stake in SapuraKencana will be capped at a more manageable 12% instead of 17% had the REPS been issued and exchanged into shares.

- All in, we estimate that the revised proposal will slightly raise the additional new SapuraKencana shares by 2% from our earlier assumption to 988mil shares (See Table 1). This leads to a marginal dilution to the group’s FY14F-FY16F EPS.

- Assuming that SapuraKencana secures the Petrobras’ tender to supply 3 additional flexible pipe-laying support vessels (PLSV), which could cost around US$300mil each, we estimate that the group’s forward net gearing is unlikely to rise significantly above 1.2x given the group’s net profit of RM1.2bil-RM1.3bil annually.

- As the group’s equity contribution for the new PLSVs may amount to /servlets/staticfile/214964.jsponly RM93mil annually over the 3-year construction period, assuming a 20:80 debt-to-equity financing for the 50:50 JV with Seadrill, we maintain our view that another equityraising exercise may not be required over the next 1-2 years following the current placement proposal.

- We are projecting the group’s FY14F EPS to accelerate by 58% due to the acquisition of Seadrill’s assets (which offers a highly value-accretive PE of 3x) and full-year accounting for the merger between SapuraCrest and Kencana Petroleum.

- Hence, with the sector’s largest order book of RM18bil (including Seadrill’s TAGs), SapuraKencana remains our top pick for the oil & gas industry. Valuation remains attractive at the current FY14F PE of 18x, which is at a 22% discount to Kencana Petroleum’s peak in 2007.

Source: AmeSecurities